BofA’s second try at catching a falling knife

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Back when Bank of America paid $2 billion for a stake in Countrywide in August there was talk about how the “strategic investment” would put to an end all the worries that the nation’s biggest mortgage lender might go under. The worries subsided only temporarily; over the past week they turned into a mini-panic that send Countrywide shares down 43%. This morning, BofA announced that it was buying the whole company without having to fork over any cash at all (that is, it’s an all-stock deal, valued at $4 billion). What does this mean?

I dunno, I’ll ask Felix:

[T]he thing to remember is that BofA’s Ken Lewis has coveted Countrywide for years: he has pretty much always been willing to buy the company at or slightly above the market price. He was faced with an opportunity to by Countrywide for little more than a rounding error in the BofA balance sheet: if he let it slip away from him now, he’d never forgive himself.

And Bank of America has now, overnight, become by far the biggest and strongest and most important operator in the world of US mortgages. Over the long term, that status is going to be hugely valuable for Lewis, even if he has to take some write-downs along the way.

Or John Carney at DealBreaker:

The best answer we’ve heard is that the deal reduces Countrywide’s cost of funding. As a stand alone entity, Countrywide’s borrowing costs had grown so high that it was going to be teetering on the verge of insolvency. But as a part of the ginormous BofA, it will be able to greatly reduce those costs to the extent that its business can be very profitable even in the short term.

Or David Reilly and Peter Eavis at the WSJ:

Mr. Lewis’s action also could be seen as a signal that Bank of America, due to report fourth-quarter results Jan. 22, isn’t likely to shock markets with bigger-than-expected write-downs of securities linked to shoddy mortgages. Analysts have expected that Bank of America likely will write down the value of such securities by between $4 billion and $6 billion but hadn’t ruled out an even bigger hit.

All I have to add is that I think we’re at the beginning of a rapid concentration of ownership in the financial services business. (Who’s next? Merrill? Bear? WaMu?) The Feds will encourage it because they fear the alternative is some kind of meltdown, but it’s probably not something we should be celebrating.

Update: Calculated Risk has some unanswered questions:

How far will prices fall? How many homeowners will be upside down? Will it become socially acceptable for upside down homeowners to walk way from their homes? What will be the impact on Countrywide (and BofA) if house prices fall 20%? If prices fall 30%? What if 10 million homeowners default over the next few years?