January 10, 2008

BofA to buy Countrywide: WSJ report

This could be one of two things, if it happens and that is a big if:

  1. A huge win for BofA, as it increases its presence in the US cheaply, or
  2. a huge mistake that will cost BofA dearly.
The win can be huge for BofA for the following reasons:
  1. BofA can use its balance sheet to resurrect countrywide and gain access to mortgage market origination that it wanted at an opportune price. Countrywide used to be a $30billion in market cap before the crises.
  2. BofA will get a market leader in mortgage origination that have higher margins.
  3. It can get a deposit base outside the federal limit as the countrywide is not considered a bank and it will fall outside the 10% limit, which BofA has reached with the purchase of Lassalle bank in the summer.
However it can also be costly adventure:
  1. No one knows for sure what Coutrywide has on its books. There can be land mines that will suck a lot of liquidity from BofA and depress earnings for foreseeable future.
  2. The higher margins in Countrywide operation was attributed to subprime lending, which all but disappeared now.
Off course all this can go away as the report proves to be false and a a market rumor. Buffett once was rumored to buy Countrywide, which proved not to be the case. However if it was true I am still undecided if it is favorable investment or not. I will need to spend sometime to understand the rationale behind it and asses its value.

2 comments:

MG said...

Nice insight.

Another postivive for BAC is that because of the crisis and the state that CFC is in, the competition bureau should let the deal through and the U.S. government will be on board with bailouts for BAC if any are required.

Sami said...

yes I agree. I think it a nice move to buy in these conditions but the risk is what is on the books of CFC. But your point is valid the the government will help BofA in that regard to avoid a big bankruptcy from a major lender.