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Friday, January 11, 2008 11:10 AM

Nationalization of the Banking System

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Bank of America to Buy Countrywide Financial for $4 Billion entirely in stock. With that purchase, Bank of America will become the nation's top mortgage lender.

The stock-swap deal will put an end to the independence of the troubled California lender headed by Angelo Mozilo, and represents an increase from the Charlotte, N.C., bank's August investment of about $2 billion.

"We believe this is the right decision for our shareholders, customers and employees," said Mozilo, Calabasas, Calif.-based Countrywide's chairman and chief executive, in a statement.

Terms call for Countrywide stockholders to receive 0.1822 of a share of Bank of America stock in exchange for each share they own. The purchase is expected to close in the third quarter. It's expected to be neutral to Bank of America earnings per share in 2008 and contribute to the buyer's bottom line in 2009, excluding merger and restructuring costs.

Bank of America expects $670 million in after-tax cost savings in the transaction, fully realized by 2011.

"The potential payoff if things improve is very big for Bank of America," said Kathleen Shanley, analyst at Gimme Credit, in an interview before the deal was announced.

"Countrywide is the largest mortgage franchise in the country, and it's a huge servicer. But we don't know how long the mortgage downturn will last and how bad the mortgage losses will ultimately be."

Countrywide debt due in 2016 was trading at roughly 41 cents on the dollar before news of a potential deal broke Thursday, while the company's bank debt was changing hands at about 70 cents on the dollar, she said.
Deal Greased From The Start

It's clear this Buyout deal was greased from the start. Countrywide's debt at 41 cents on the dollar may just have been the ticket to get the deal done.

Who wanted to see a cascade of defaults on that? That risk has just been transferred to Bank of America. Billions were riding on a default of Countrywide. Winners and losers traded places overnight.

Nationalization of the Banking System

Mr. Practical
chimed in this morning with these comments on the deal:
We are starting to see the first steps in nationalization of the U.S. banking system. Large institutions are being "cajoled" into buying smaller ones. They could wait for bankruptcy to buy the assets, which would be smart, but they aren't as I believe the show is worth much to Washington: it is very important that equity investors be calmed by that stabilization effect.

No matter. As the bad assets are pooled we will eventually see some type of government bailout or quasi-nationalization of the banking system. Banks literally have no capital left.

Stay the course. Risk is high. We will be seeing many more "interesting" things from government as it becomes a larger and larger part of the economy. But remember, stocks are options on profits. The real owners of companies are bondholders who always get paid first.

When companies raise capital at 12%, like Citigroup (C), profits go away. When the government steps in, profits go away.
Mozilo Wins Big Running Countrywide Into The Ground

Countrywide's Mozilo is entitled to $115 mln severance.
Countrywide Financial Corp. founder Angelo Mozilo is entitled to $115 million in severance-related pay if his troubled company is acquired by Bank of America Corp. (BAC) , The Los Angeles Times, citing regulatory filings, reported Friday.

The newspaper said free rides on the company jet are also included in Mozilo's departure deal, and the company will pick up his country club bills until 2011.

Neither Mozilo nor Countrywide officials returned calls for comment, The L.A. Times said.
This is great news for Mozilo. He can concentrate on his tan after raking in over $1 billion dollars over the years on Countrywide stock options.

Countrywide CEO with Hoofy and Boo

Click here for some practical advice for Angelo Mozilo CEO of Countrywide.

Mike "Mish" Shedlock
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