Saturday, January 12, 2008

BOA Averaging Down

To me, averaging down means you totally ignore the fact that you were terribly wrong in the first instance, and went in with fuller gusto the second time around at lower prices. That's Bank of America.
Bank of America offered an all-stock deal valued at $4 billion for Countrywide - a fraction of the company's US$24 billion market value a year ago.

The deal is a landmark in the housing crisis, given Countrywide's prominence as the nation's largest mortgage lender, at least until recently. Bank of America's move is a gamble that the U.S. is nearing a housing bottom and crystallizes the divide on Wall Street over whether now is the time to buy housing-related assets on the cheap - or flee from them to avoid further losses.

Or is it a gamble. BOA did invest back in the middle of last year when trouble first hit Countrywide. A loan which is convertible into Countrywide shares at an effective US$18 or so. The share price has since fallen to US$5. BOA is buying a deeply troubled company, and it faces the risk that Countrywide's assets could continue deteriorating.

As of Sept. 30, Countrywide's savings bank held about US$79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans - where Countrywide doesn't have first crack at the collateral in case of default - or option adjustable-rate mortgages, which let borrowers make minimal initial payments and face sharply higher ones later. Overdue payments by Countrywide borrowers are surging as house prices drop and loans reset to higher payments.

Bank of America already has a full plate. It is still digesting its US$3.3 billion acquisition of U.S. Trust and the US$21 billion purchase last year of Chicago's LaSalle Bank. The same team that reviewed the Countrywide acquisition is also leading the restructuring of Bank of America's troubled corporate and investment bank, which has taken its own big hits in the credit-market turmoil.

BOA made its initial investment in Countrywide in August, purchasing preferred shares convertible to a 16% stake in the company. The deal looks like a sorry deal that the CEO has to follow through. Well, if you though it was good around US$20, it must be better at US$5. To me, that's totally ignoring the fact that he read it wrong in the first place. Great CEO strategy. All within 5 months.

BOA was one of the least affected among the big banks with sub prime write downs. The company should have stayed the course and not try to be too smart. Well, they have dug a hole for themselves already, might as well continue digging.


rask3 said...


If Countrywide had racked up losses in billions, that could be used by a profitable bank such as BOA to offset against their tax bill. On a staggered basis, if I'm not mistaken. May be that was the thinking behind the current move. I'm not too sure, though.


bantersy said...

hi dali,

what about those sovereign funds that are pumping in billions of dollar. aren't they digging their own grave as well? everything has a price, in midst of difficulty, if valuation is fair, shouldn't some counters be worth buying? talking about palm oil play, some of the counters have racked up 3x the value since 3Q last year. what is deemed fair in valuation? most stocks have came down. using a long term view, the valuation may work out to be quite a good buy. of course, market is sentiment driven and sad to say now it is quite bleak and sell seems to be the only call by everyone. citi has just released yet another set of result with more write down. with more info being released into the market, uncertainty is more certain now than months ago.

remember your call earlier that you believe market will gear up again especially US and HK but what make you reversed your gear and calling an exit on any sign of tumbling. if these few days of wrecking fit your definition of wobble, should investor turn to the exit door now and sooner?

not trying to dig out the wrong calls you have made last year but you called for japan and korea market to be top pick for 2H 2007. on hindsight, it turned out otherwise. exactly, in your opinion now, what actually gone wrong.

just wish to pen down my thoughts here and learn more. thanks!

Annie said...

Hi Dali

Can you tell me more about investment secured as lien. Is there a possibility to create such lien in Malaysia? How can it be secured in the Malaysian context? Is registration possible at the CCM? As far as I know usual practice here in Malaysia is in the form of debenture.

Enlighten me, O-Dali One!


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