Bank of America Is Brave

Well, well. Bank of America to buy Countrywide this morning. That's pretty brave of them.

We wish them luck, and hope that there are no really unpleasant surprises left in the box.

Comments

[jerry]

Yeah, fly on the wall on those conversations! One wonders what sort of pics were just about to be sent to the wives....

[pgl]

When I saw this news, my sense is that there is some BofA shareholder lawsuit down the road. I hope my dismal prospects for Countrywide's business are wrong I'm not betting the ranch on it.

[save_the_rustbelt]

Brave or stupid like the PE company that bought Chrysler? Time will tell.

[Nicholas Weaver]

Well, it makes sense, really.

This is an all stock deal, valued at $4B out of a BofA market capitolization of ~$170B. So its effectively free.

Now either one of two cases are true. Either the losses have hit and Countrywide has a solvency crisis. If this is the case, the BofA buyout is a great deal, BofA solves the solvency problem, and ends up being in charge of a huge amonut of depositys and mortgage servicing. Nice place to be for 0% to the bank and 2% cost in shareholder dilution.

Or there are other demons still lurking in the Countrywide and BofA balance sheets.

In this case, the BofA buyout is a great deal for those in charge of BofA: Its a "Heads I win, tales you lose" bet (because of how all the compensation is structured), and, better yet, by being in charge of a huge amonut of the deposits and mortgage servicing, now you are REALLY in the "too big to fail" bucket, so you will still even have a job for a long time if the manure really hits the fan, as you're practically guarenteed a bailout if something goes horribly, horribly wrong.

[Ken Houghton]

BofA (the real one) was expanded in the 1990s on acquiring other banks that had run afoul of their mortgage portfolio (Security Pacific, SeaFirst, ContIlly).

The only change in strategy now is that it's the doofus in NC who will be running the combined operation.

[Michael]

They can always rely on their usurious credit card business to generate offsetting income.

[Michael]

They can always rely on their usurious credit card business to generate offsetting income.

[Craig Nelson]

When the now BofA bought the then BofA, they got much the better of the deal. The doofusses in North Carolina are actually sharks.

[The Raven]

I wonder how many people in debt to Countrywide have BofA account?

Caw!

[Jonathan King]

Nicholas Weaver writes:
>
> This is an all stock deal, valued at $4B out of a BofA market capitolization of ~$170B. So its effectively free.

The price may be low, but unless there really is some exotic side deal with the Treasury or the Fed, BofA has just bought (in the short term) a lot of potential pain in the form of likely losses in this business. The hope is that, in the long term, there is useful enterprise value here.

To be honest, I found the deal really strange. If Countrywide was about to go bankrupt (and they apparently were), then BofA could have gotten the company for probably less than free because they were a secured creditor (having plowed $2 billion into the business just a few months ago). The advantage of buying CFC in bankruptcy is that they could have gotten rid of a lot more responsibility for debts. The disadvantage of waiting is that either somebody else might come in (and give BofA like 20 cents on the dollar) or that the mere fact that Countrywide goes bankrupt leads to bigger problems in the economy overall.

In the end, I am still wondering if this wasn't just an example of a decision caused by the Sunk Cost Fallacy.

[Chris]

Bank of America is not a public utility. Why should it do something risky for its shareholders? It would have been smart to keep its "money" and leave CFC alone.

[MobiusKlein]

If you factor in the large loans BofA has made to Countrywide, then you may envision the deal as a way for BofA to not have to show a loss on those loans, as it now owes money to itself. No defaults, so stock price stays high.

Countrywide management will get the golden parachute, and nobody has to know the roses are made with manure.

[ANIN-KOFI ADDO]

THE PROBLEM COMES ABOUT WHEN COMMERCIAL BANKERS PUT ON THE CAP OF INVESTMENT BANKERS. BY SO DOING, THE COMMERCIAL BANKERS FORGET ABOUT RISK.DID LONG-TERM UNDERSTAND RISK? NO. THERE WERE SOME NOBEL PRIZE WINNERS WHO MASQUERADED AS RISK MEN. THEY KNEW NOTHING ABOUT RISK.DID THE BANKERS INVOLVED WITH SUB-PRIME CRISIS KNOW ABOUT RISK? NO. THEY WERE COMCERNED WITH THEIR FEES AND BONUSES.

RISK MANAGEMENT -- THAT IS WHAT AMERICAN BANKERS ARE IGNORANT (MORE LIKELY, DISMISSIVE) OF. AMERICAN -- AND HENCE THE WORLD -- WILL CONTINUE TO SUFFER (ANOTHER CRISIS WILL SURFACE SOON) UNLESS WE BEGIN TO WORRY ABOUT RISK.