Countrywide Buyout Deal Greased From The Start

Surprise! Surprise! Surprise!
Feds seem to favor Countrywide buyout.

Bank of America's anticipated proposal to rescue mortgage lender Countrywide Financial Corp. would also come as a relief to federal regulators.

By purchasing Countrywide, Bank of America Corp. would prevent the largest U.S. mortgage lender from filing for bankruptcy and thereby avert significant damage to the home-loan market — a mess the Federal Reserve and other agencies desperately want to avoid, analysts said, and one that poses far greater risks to the economy than mortgage industry consolidation.

The Wall Street Journal and The New York Times reported online Thursday that a deal was in the works, citing unidentified people familiar with the deal. The transaction would put the country's largest mortgage lender in the hands of the largest U.S. bank by market capitalization.

The potential deal is "by far the most palatable way to resolve Countrywide's problems" said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.

Cecala said a failure at Countrywide would put the mortgage industry and its regulators in the extremely uncomfortable position of trying to figure out who would be responsible for collecting payments on millions of home loans. It could also be a huge blow to government-sponsored mortgage finance companies Fannie Mae and Freddie Mac, which are major buyers of Countrywide's loans.

A combination of Bank of America and Countrywide would require approval from the Federal Reserve, and possibly other agencies. Banking regulators declined to comment on the reports.

Federal law bars banks from making acquisitions that would increase a bank's market share to 10 percent of U.S. deposits, and Bank of America is nearing that point at 9.88 percent. However, experts disagreed about whether deposits held by Countrywide's federally regulated thrift, Countrywide Bank, would count toward that limit.

Deal Greased From The Start

Yesterday in Read Between Bernanke's Lines: Things Are Going To Get Worse I asked a highly respected friend of mine this question: Could there have been encouragement, cajoling, dare say it begging by the Fed and/or treasury for Bank of America to bail out CFC to prevent a cascade of defaults?

Here was the reply: "The smart money says yes. Have You read Confessions of an economic hit man?"

Unusual Trades Raise Eyebrows

Unusual trades in Countrywide calls raise eyebrows

Unusual call trading in Countrywide Financial Corp (CFC) on Thursday before news that Bank of America Corp (BAC) was in talks to buy it has some option players asking if word of a pending deal had leaked to the market.

About 304,000 calls compared with 248,000 puts traded in Countrywide, a combined volume five times its normal level, according to market research firm Trade Alert.

"It looks like somebody was informed because the call volume in Countrywide was so heavy earlier in the day ahead of news that Bank of America may be close to a deal for the mortgage giant," said Jon Najarian, co-founder of Web information site optionmonster.com in Chicago.

That included about 19,000 January contracts, allowing holders to buy Countrywide stock at $5, which traded before the stock leaped above $8 after the Wall Street Journal reported the possible takeover of the top U.S. mortgage lender.

The January $5 calls closed at $3.20 a contract, up from a range of 65 cents to $1 earlier in the day. The 19,000 $5 calls apparently bought before the news represented a paper profit of a potential $4 million at the end of the day, Najarian said.

This deal was greased from the start. There is no way that announcement was made without knowing for sure the Fed would approve. The question now is: Who Knew? Not that we will ever find out, but perhaps the bankruptcy rumor came from the very same people that bought those calls. Wouldn't that be something?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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