Tuesday, 6 May 2008

B of A Genius Comes Home to Roost

Back in September, I noted that B of A's so-called bargain of purchasing Countrywide stock at $18 a share was no bargain at all. That was borne out when B of A decided to purchase the whole company for $7.16 in January.

At that time I said that B of A was throwing good money after bad. Yesterday a report from an analyst at FBR Capital Markets suggests B of A could and should lower their bid or walk away from the deal altogether.

BofA may lower Countrywide bid to $2/share or below: analyst

Bank of America Corp. (BAC) is highly likely to negotiate a sharply lower price for Countrywide Financial Corp. (CFC), and should just walk away from the deal altogether, an analyst said Monday.

Bank of America could face $20 billion to $30 billion in write-downs of Countrywide's mortgage loans after it closes its acquisition of the troubled mortgage lender, FBR Capital Markets analyst Paul J. Miller Jr. told clients in a research note.

"BAC should completely walk away from the CFC deal, as CFC's loan portfolio will prove a drag on earnings and could force BAC to raise additional capital," Miller wrote.

Shares of Countrywide fell in premarket trading to $5.10 a share, down 14.7%, before recovering slightly in recent trading to $5.40 a share, down 9.7%.

Even if Bank of America sticks with the deal, it's likely that it will cut its offer "down to the $0 to $2 level," and force Countrywide's bondholders to absorb the remainder of any write-downs, the analyst said.

Whether this analysts predictions will come true is far from certain. However when B of A paid $18 a share for Countrywide those in the know said it was a bargain. Then, when they offered just over $7 a share, Wall Street lemmings said that they should know what CFC is worth because they had 6 months to work it out.

The fact is B of A didn't have a clue when they paid $18 a share, had barely any more of a clue when they offered $7 and change a share and now looks even sillier because CFC is basically worthless.

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