Herb Greenberg does his usual excellent job of digging into the deal and providing a reasonable range of speculations as to the motivations: The Real Story on Countrywide Cont'd - Herb Greenberg
To summarize:
1. The Fed brokered or facilitated the deal because Countrywide was on the verge of insolvency which would have had a significantly negative impact on the financial markets, a la LTCM. Bank of America had significant skin in the game already because of their two billion cash already in, AND significant counterparty entanglements that might have jeopardized BAC itself should CFC have failed.
a. Moody's had just downgraded thirty tranches of Countrywide's mortgage debt. Similar downgrades preceded the American Home Mortgage bankruptcy. It was well known that Countrywide was in capital and cash flow difficulties.
b. As counterparties go, they do not get much bigger than Countrywide when it comes to holding US mortgage debt. One can only speculate at this point what sort of entangling obligations CFC had with mortgage reinsurers AND the Credit Default Swaps that may have be put on Countrywide (in huge multiples of their book value).
There is little doubt in our minds that the Fed helped to broker the deal. Unlike Hank, we don't think necessarily that the Fed 'promised' anything as part of the deal, any moreso than they had done with LTCM. But we have an open mind on this topic. The Fed seems to be taking quite a bit of opaque assets on, judging by the recent precipitous drop in their Treasuries holdings in the past few weeks, to be supplanted by "other loans and repos." But this begs the question, Why Bank of America, and why now?
We'd like to add two reasons
for this acquisition based on our experience in the M&A business, in our own case as both acquisitor throughout the 90's specializing in valuing high tech startups in Boston and Northern California, and as an acquiree, having sold our own company to a tech behemoth in late 1999.1. Never, ever, discount the impact of egos and momentum in corporate decision-making, especially in a poorly managed company where personalities and not principles rule the day. We do not know enough about Ken Lewis and BAC to make any judgement here, but we can't rule it out either. They are the right size and structure for it.
Some have suggested that the company did the deal to try and salvage their two billion cash initial investment. If this is true chalk one up for egos and poor management. That initial position was a sunk cost. Period.
2. Is Bank of America paying in what they consider to be an overvalued currency? Their first tranche was cash. But the acquisition itself is for stock, as in their own stock. Let's take a look at a chart of Bank of America:
Compare the chart of Bank of America with that of Countrywide Financial. Perhaps BoA received a much closer and better look at CFC as a big investor, and decided not to acquire some of the key pieces of the operation, and avoid any of the pending litigation for various lending infractions, but decided it was strategic to buy the whole thing (with stock). Plausible? Kind of.Or is BAC looking at its own balance sheet, its own stock price, and thinking, 'there but for a little time and disclosure goes our own stock price, down to pre-bubble levels. At 7 dollars equivalent CFC might have been 'cheap' at least compared to the 40 it was worth before it imploded. But if BAC's stock follows a similar course, then at 3 dollars equivalent and two billion dollars it looks a whole lot cheaper.
As a veteran CEO once told us, "You may think I'm paying too much for this company, based on your valuation. But in order to say that you'd have to know more about what my own stock is worth than I do, since that's what I'm buying it with." By the end of 2000, we could not help but see his point, and agree.
