Friday, 24 August 2007

B of A's vote of confidence

By now you would have heard of Bank of America's (BAC) $2 billion investment in Countrywide Financial Corp. (CFC). The spin from the market is that B of A's move is a vote of confidence in CFC.

No doubt B of A have crunched the numbers and believe $18 (the conversion price of CFC stock) represents good value. Does CFC really need this injection or is it just another attempt to put a happy face on a dire situation?

Just one week ago CFC announced that they would suck their entire $11.5 billion credit facility dry just to keep afloat. Now add another $2 billion. How much is enough to make sure they don't go under? B of A's CEO had this to say about their investment:

"We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets," said Kenneth Lewis, Bank of America's chief executive, in a statement. "In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."
Interesting the order in which the 2 reasons for the investment were given. Hope? Is that any basis for an investment decision? A couple of questions I'd like answered before making such an investment decision?

Is the investment predicated on a return to more 'normal' credit market conditions in the near future? What if normal is a lot further in the future than forecast? In what kind of shape will CFC emerge at the end of this credit crunch? What shape will their earnings be in? Will they be worth $18 then?

This could be looked back on as a very shrewd investment decision by B of A, then again it could look a little silly.