It's the second time this week we have started out an article talking about
the rumors flying around Countrywide, but this time the rumors
seem to have more grounding in fact and are certainly much better news for Coutrywide,
its employees, and stockholders.
On Tuesday the buzz on Wall Street was that Countrywide could not survive the
financial crisis it was in due to its high profile role in subprime lending.
Bankruptcy, the "experts" were saying, is coming and coming soon.
The stock lost a huge chunk of its value that day and the company's problems
contributed in no small part to the Dow Jones falling over 200 points.
But Thursday the rumor was that Bank of America Corporation
was in "advanced talks" to buy Countrywide and the stock's price soared in minutes
from around $5 a share to close to $9 before settling down to close at $7.75.
By late afternoon both Reuters and the Wall Street Journal were reporting the
rumor as fact, saying that Bank of America was preparing to follow-up its August
investment of $2 billion in Countrywide
preferred stock (at approximately $18 per share - ouch) with an outright
purchase of the company. The bank confirmed this morning that it is offering
$4 billion in stock to buy the troubled mortgage lender. Countrywide shareholders
will receive 0.1822 of a share of Bank of America stock for each share they
own of Countrywide. This values Countrywide stock at 7.16 per share, 7.6 percent
less than where the stock finished up the day on Thursday.
The transaction is expected to close in the third quarter of 2008.
This deal, if sealed, would make Bank of America the largest mortgage
lender and servicer in the country. Much of its growth has been fueled
through acquisitions under its president Kenneth Lewis. In the last four years
he has purchased FleetBoston Financial Corporation (which itself had earlier
swallowed up the bankrupt Bank of New England and its Maine and Connecticut
subsidiaries, Bank of Boston, and Sterling Bankcorp), MBNA, the credit card
company; LaSalle Bank Corp.; and U.S. Trust, spending $100 billion in the process.
Not everyone was viewing the proposed buyout as a plus for Bank of America.
The Wall Street Journal warned that the many lawsuits brought
by borrowers against Countrywide alleging lending and loan-servicing abuses
might place its new owner in significant legal and financial jeopardy unless
it takes steps during the acquisition process to limit its exposure to the suits.
Bankruptcy would have severely reduced the litigants' recovery but typically
in an acquisition the party buying the assets must agree to address pending
litigation.
In addition, the attorneys general of Illinois and California are investigating
Countrywide's mortgage-lending practices and attorneys at the Justice
Department are looking at allegations that the company misrepresented borrowers'
debt and the handling of their payments during bankruptcy proceedings.
In another interesting take on the story, Hank Greenberg, writing in his MarketBlog
opines that the federal government could be behind the deal and has likely agreed
to guarantee Bank of America against Countrywide-related loss. While he hastened
to add that there was no evidence of the latter, it is intriguing.
And there were also rumors this morning that another big mortgage lender/servicer
might disappear into the maw of a larger financial institution. CNBC is reporting
the Washington Mutual has held "very preliminary merger talks
with JPMorgan Chase. This is far from a done deal as JP Morgan is also exploring
the purchase of two other banks - SunTrust and PNC.
In December Washington Mutual announced it would cut its dividend along with
over 3,000 jobs and attempt to raise $2.5 billion in new capital as it struggled
to cope with mortgage related losses.