You've Been Warned: Bank of America Eyeing Countrywide
Analyst cautions bank to steer clear of mortgage lender.
If the pending Countrywide-Bank of America combination were a wedding ceremony, Friedman, Billings, Ramsey Group analyst Paul Miller would be the guy in the back of the church raising his hand in objection.
In spite of rumors of bankruptcy and liquidity concerns, Bank of America (BAC) indicated in early January that it plans to purchase Countrywide Financial (CFC) for about $4.1 billion in stock. While some thought the price was too lofty given the potential risk, the fact is that BofA had the opportunity to pick up Countrywide's vast mortgage business on the cheap (compared to historical levels) - and it acted.
Unfortunately, its low price hasn't quelled all concerns. On Monday Miller disseminated a research note, which according to a Bloomberg report, said:
Bank of America, the second-biggest U.S. bank, may have to write down the value of Countrywide's loans by as much as $30 billion because of declining home prices.
Miller thinks there's a chance that the deal (more specifically Countrywide's loan portfolio) could cause B of A to raise additional capital. This is particularly disturbing for both investors in both firms.
With regard to Bank of America, investors have enough to worry about. After all, its stock is well off its 52-week high. In addition, nobody knows for sure when the blood letting in the credit markets will abate. And so the prospect of obtaining an entity that Miller seems to think could have an adverse impact on earnings (at least for a period) doesn't exactly inspire enthusiasm.
On the flip side, if indeed Bank of America did walk away or cut its offer, there is a chance the stock could pop.
With regard to Countrywide, Miller's report is also a concern. That's because, if Bank of America does go Miller's route, its unclear if another suitor might emerge. In fact, given the uncertainties, one might assume that other players in the financial services industry won't exactly be knocking down its door.
What are the odds that Bank of America will shy away?
The reality is, you never really know. However, Bank of America spokesperson Bob Stickler did reportedly come out and say that the transaction is on track to close in the third quarter. The fact that the company came out with such a statement, apparently to stifle speculation, seems to be a sign that it will stand by its word - at least for now.
Look for Countrywide to trade higher at the open based on the Bank of America statement. But keep in mind that the third quarter is still a ways a way and a lot could go wrong in the interim.
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