UPDATE: 01-31-08 The Financial Times reports...
"Bank of America’s $4.1bn offer for Countrywide Financial was thrown into doubt on Thursday when a large shareholder in the biggest US mortgage lender said it would vote against the deal."
"SRM Global Fund, a Monaco-based hedge fund which has a 5 per cent stake, said the offer “considerably undervalued” Countrywide. It also plans to ask the Securities and Exchange Commission to investigate changes in Countrywide’s share price ahead of last month’s offer."
In other reports, the Federal Reserve, Bank of America and Countrywide are all denying that the Federal Reserve initiated or was involved in the original talks between BofA and Countrywide. And the Fed was "pleasantly surprised" at the workout talks between the two parties.
According to an article in the Wall Street Journal...
"The fear of potential regulatory crackdowns helped drive Countrywide Financial Corp. into the arms of acquirer Bank of America Corp., people familiar with the situation say."
"Though the big home-mortgage lender faced large and unpredictable losses on defaults, the more immediate danger was pressure from regulators, politicians and rating firms, these people say. That realization helped spur Countrywide co-founder and Chief Executive Angelo Mozilo to call Bank of America in December and start talks that led to the Charlotte, N.C., bank's $4 billion deal to acquire Countrywide, which was announced Jan. 11."
Original Blog Entry...
What is the Federal Reserve's role in the announced merger between Bank of America and Countrywide?
Many in the mortgage and greater financial community believes that the Federal Reserve reached out to save Countrywide Funding because it was the largest and most visible mortgage company in the nation. And that institutions of Countrywide's size are simply too large to fail without causing dangerous self-reinforcing ripples in the banking community and the overall United States economy. The mere fact that Countrywide was attached to a Bank (technically a Thrift) provided the Federal Reserve with the opportunity to take action. Many also believe that the Federal Reserve may have tacitly provided prospective merger partner, the Bank of America, with an indemnification against major mortgage investment portfolio losses that may in the near future.
In any event, Bank of America was handed a sweetheart deal according to the preliminary information presented by Bank of America on 1/11/08.
Transaction: |
100% of Countrywide |
| Exchange Ratio: | .1822 BAC share |
| Consideration: | All stock |
| Pricing Multiples: | .31x tangible book value |
| Due Diligence: | Completed |
| Expected Closing: | 3rd Quarter 2008 |
| Approvals: | Customary regulatory and CFC shareholder |
Considering that all of the due diligence has been completed, the Bank of America, Countrywide and its combined auditors and advisors must have placed a value on CFC's current portfolio and liabilities as well as any contingent liabilities which may materially affect the transaction.
Is there no other solution to the Countrywide situation or is it that there are no executives capable of executing an alternate scenario?
Considering that BAC is acquiring CFC for approximately one-third of its book price, the company's value should the company be liquidated, one might ask if there were other options that would have benefited the shareholders.
Could the Thrift have been divorced from the mortgage origination operation and the shares spun off to existing shareholders on a pro-rata basis?
Could the mortgage servicing portfolio been sold without resorting to selling the entire company. Perhaps in conjunction with one of the best servicing systems in America.
Could Countrywide's extensive real estate portfolio in California, Texas and other locations be spun off to a real estate holding company?
And what of the Countrywide affiliates such as Balboa insurance?
How hard did the advisors try to sell Countrywide, perhaps to a foreign entity or was the Bank of America deal preordained?
Considering the abilities of Countrywide's advisors, did they simply pocket their fees and take the easy way out? Who else was considered?
Why not strip out toxic assets...?
Personally, I can see no reason why the assets could not be stripped out of Countrywide -- as has been done on numerous occasions by other large companies -- and the toxic waste placed in a container corporation to either resolve itself over time or allowed to default into nothingness.
Could Countrywide have returned significant value to their shareholders if a pre-packed Chapter 11 scenario was executed?
In spite of Countrywide's CEO making somewhat rosy projections about a return to profitability in the last quarter and his alleged letter to the employees, I feel that someone is not telling the whole truth and that the shareholders are being royally screwed.
From Angelo Mozilo's alleged letter...
"As you know, the unprecedented and worldwide dislocation of the credit markets combined with actions taken by regulators, rating agencies, legislators, the media and others have strained the housing and housing finance sectors as never seen since the Great Depression. Almost without exception, every financial institution, both large and small, has been negatively impacted by the events that drained liquidity from all sectors of the financial services industry. Countrywide has been weathering this storm through the dedication and hard work of our management and employees. However, we have come to recognize that those companies with reliable sources of capital and liquidity and significant scale will be the ultimate winners in this environment and in the longer term as the mortgage markets normalize."
SO YOU HAVE SAID FOR THE PAST NUMBER OF YEARS! SURELY YOU KNEW OR WERE ADVISED OF THE PERILS FACING THE INDUSTRY?
"We also recognize that, as the industry changes and consolidates, we must embrace these changes."
WHY?
"In order to enhance what we have all worked so hard to build over the past 40 years, we have taken a decisive step to ensure our continued industry leadership. Today, we have announced that Bank of America, which has been an important financial partner of Countrywide for many years, will be acquiring our Company."
THE DREAM IS OVER -- THE CORPORATION IS NOT A LIVING BEING -- IT IS AN INVESTMENT VEHICLE TO RETURN VALUE TO ITS SHAREHOLDERS.
"As you will see in the attached press release announcing this transaction, BofA has announced that it plans to operate Countrywide separately under the Countrywide brand, with integration occurring no sooner than 2009. We are confident that both our servicing and origination businesses, as well as other aspects of our operations, will be substantially enhanced as a result of this transaction."
OTHER THAN PROVIDE ACCESS TO CAPITAL FOR COUNTRYWIDE'S ONGOING OPERATIONS, WHAT, IF ANY, OTHER ADVANTAGES EXIST FOR THE MERGER?
"We are already commencing the process of developing a detailed and well-organized integration plan, and we will be updating you as this process moves forward. Dave Sambol will be working closely with me and the entire senior management team to ensure an efficient and effective transition. Dave will be spearheading all of these initiatives to ensure not only a smooth transition but, as importantly, the continuation of Countrywide's leadership in mortgage finance."
"Finally, I want to thank everyone who has stood by my side during the past four decades to make the dream that Dave Loeb and I had 40 years ago become a reality. When we join together with Bank of America, I am counting on your commitment and dedication to continue to realize this dream."
Is this the beginning of the executive and skilled expertise migration?
Well, there are questions about how dedicated the Senior management will be in light of the BAC merger. Already the financial press is reporting that Richard K. Jones, Countrywide's Chief Information Officer for the last eight years (twelve years at Countrywide) is leaving to join Fiserv, Inc., a provider of mortgage technology located in Brookfield, Wisconsin.
Our dreams diverge...
And, as admirable as Mozilo's 40-year old dream may be, my dream is to profit from my investment in Countrywide; not wishing to see my shareholder value and profits if any (currently underwater by $15/share) blown into the ether just to preserve the Countrywide infrastructure for another company.
I like the idea of a Chapter 11 restructuring -- but say this with the caveat that I do not know what the impact of Countrywide's seniority bonds would have on a fully-diluted stock base. More research needs to be performed.
What can YOU do?
This is far from a done deal ... if regulatory and shareholder approvals are required. Even though the majority of stock in Countrywide may be effectively controlled by a few individuals and/or institutions, minority stockholders do have rights under the law. Unless Countrywide is forthcoming about how they maximized the value for their shareholders, in light of recently executed parachute agreements, I urge a NO VOTE for the merger.
If the Bank of America cannot improve upon this offer, perhaps letting Countrywide go into a Chapter 11 receivership may be the best way to recover additional value from the company.
Demand full disclosure (dates and amounts) of all executive compensation agreements executed within the past five years.
Demand to know under what conditions Stanford L. Kurland resigned as President of Countrywide and if they are somehow related to today's events.
Ask if all Countrywide country club memberships and charitable donations have been curtailed during this financial crisis.
Each and every shareholder should continue to keep an eagle eye on this proposed merger. Continue to ask questions of CFC management as to how this merger scenario played out and what alternatives were considered.
-- steve
A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…
The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius
Disclaimer: The author has a miniscule position in Countrywide common shares.
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