Friday, 11 January 2008

Throwing Good Money After Bad

Bank of America continues to make dumb investment decisions with their latest master stroke to double down on their disastrous bet on Countrywide Financial. From Bloomberg:

Bank of America to Acquire Countrywide for $4 Billion

Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion, five months after making a money- losing $2 billion investment in the unprofitable mortgage lender.

Bank of America will acquire Countrywide for approximately $7.16 a share in stock, the Charlotte, North Carolina-based company said in a statement today. The offer is 7.6 percent below Countrywide's closing share price on the New York Stock Exchange.

"I hope Bank of America isn't throwing good money after bad," said Eric Schopf, a fund manager at Baltimore-based Hardesty Capital Management LLC, which owns 216,000 Bank of America shares, before the takeover announcement. "They struck a deal that wasn't very attractive. Hopefully they can get it right the second time around."

Investors should beware when the word 'hope' is being thrown around by the so-called professionals. Remember what was said back in August when B of A paid $18 a share? Let's rewind:

"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."

The Wall Street lemmings are out in force claiming that B of A has had 6 months to look under the hood of CFC so they should know very well what the company is worth. I think that is a fairly reasonable view if you walk around with your head firmly lodged in your ass. Let's face it, B of A has no idea what Countrywide is worth. They paid $18 a share just 4 and half months ago. Apparently now $7.16 is a good price.

Countrywide, the largest independent U.S. mortgage company, gives Bank of America about 9 million borrowers and fees from servicing $1.5 trillion of mortgages.

No doubt there is value in Countrywide's extensive branch network. However B of A will also be taking on massive credit losses. Remember this chart?

This is clear case where the trend is not your friend. B of A says the deal is eps neutral for 2008 and will be eps positive in 2009. I doubt very much whether this deal will be eps neutral this year with the amount of forecast loan losses CFC is facing.

In the absence of this deal, CFC is bankrupt. CEO Angelo Mozillo's behaviour has been nothing short of criminal as he cashed in on options worth more than half a billion dollars whilst continuing to sing the company's praises when all the while the company was going down the gurgler.

In September I noted that B of A's intial stake in CFC was no bargain and this will turn out to be another poor investment that B of A shareholders will be paying for in the next few years.