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Monday, May 05, 2008 1:47 PM

Countrywide Shares Worthless?

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Analysts say Bank Of America may lower Countrywide deal price.

At least two analysts said Bank of America Corp (BAC) will likely lower its purchase price for Countrywide Financial Corp (CFC), with Friedman, Billings Ramsey analyst saying the bank may bring down its deal price to the $0 to $2 level or completely walk away from the deal.

Shares of Countrywide, the largest U.S. mortgage lender, fell nearly 12 percent to $5.29 in morning trade on the New York Stock Exchange, after Friedman downgraded Countrywide to "underperform" from "market perform."

Analysts at S&P Equity Research expect Bank of America to complete the buyout of Countrywide, but at a lower price due to the rapid deterioration of Countrywide's credit portfolio.

Miller cut his target on Countrywide's stock to $2 from $7.

Bank of America, which in January agreed to buy Countrywide for $4 billion, said in a filing last week there was no assurance that any of the mortgage lender's outstanding debt would be redeemed, assumed or guaranteed.

"Bank of America announced that it might not guarantee Countrywide's debt, which is most likely the first step in renegotiating the entire deal," Miller said. "We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away."

S&P Equity Research analysts also said they were "particularly wary of Countrywide's option ARM portfolio because we do not believe that it has yet been stress-tested."

"Indeed, one of our major concerns about Bank of America is the potential inheritance of Countrywide's option ARM portfolio," they added.
CFC Preferred Stocks Action Suggest Deal Price Dropping

Minyanville Professor Bennet Sedacca had this to say:
Judging by the way that Countrywide(CFC) preferred stocks are acting, my opinion is that the deal gets done at a significantly lower price than $5 and that common shareholders will be lucky to get anything at all.

Buried in the $2 billion investment Bank of America (BAC) made in CFC was the fact that BAC has 'last look' to buy the company. That was the main reason for that deal, me thinks.

So I imagine common shareholders get little if anything, preferred holders get potentially wiped out and some subordinated debt holders could get smoked as well.

The same could be said for Washington Mutual(WM).
Over the years ex-CEO Mozillo cashed out $1 billion in options. Look at all the buybacks of CFC and other financials at ridiculous prices over the past few years. Clearly shareholders would have been far better off with dividends. CFC was at $5 in 1996. It hit $42.5 in 2007. CFC may be worthless in 2008, but share buybacks supported the stock price allowing Mozillo to cash out $1 billion in options.

Ambac (ABK) needs to raise cash at $5 while having bought back shares at prices over $70. Inquiring minds may wish to consider this flashback From October 30, 2007: Stock Buybacks: A Good Thing Or Slipped DISCs?

Now we see the absurdity of companies like Citigroup borrowing money at 8% to pay dividends of 5% after having bought back shares at prices twice what they are now. It does not make economic sense to borrow money at 8% to pay a dividend of 5%. So why is Citigroup doing that? The only possible reason is Citigroup executives think there will be an adverse reaction to share price if they cut the dividend.

CEOs manage companies for their own benefit, and the benefit of insiders, not shareholder benefits. It's important to always keep that in mind, especially when it comes to share buybacks and dividends.

Mike "Mish" Shedlock
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