Bank of America can keep saying yes to Countrywide, but the skeptics just won’t go away.
Last night over dinner with Oppenheimer & Co analyst Meredith Whitney, BofA chief Kenneth Lewis said the bank will go ahead with the roughly $3.1 billion purchase of the giant money-losing mortgage lender and that it still makes sense for it to do so.
Lewis said the bank’s planned acquisition remains attractively priced, even if write-downs at Countrywide exceed expectations, Whitney wrote in a research note.
On Wednesday, Lewis reaffirmed his commitment to the acquisition at a Wall Street Journal conference, saying it was an important strategic move.
Lewis said he remains undeterred even as many consumer advocates, lawyers and politicians have criticized the merger and Countrywide’s lending practices.
Countrywide shareholders are scheduled to vote on the merger on June 25, and Bank of America, which agreed to buy Countrywide in January, has said it expects a third-quarter closing.
As the closing date nears and Bank of America repeatedly re-assures investors, the arbitrage spread on the deal has significantly tightened. The spread, the difference between the offered takeover price and the target company’s current trading price, was more than 40 percent on May 8.
But Countrywide shares were trading at $4.72 on Wednesday afternoon, which is still more than 10 percent below the all-stock transaction price of about $5.30 per share.
Some analysts have estimated that the bank could face more than $10 billion of losses tied to Countrywide’s portfolio. And last month Bank of America said in a regulatory filing that it might not assume all Countrywide debt.
The skeptics here could be worried about the huge downside to the bet that a deal will indeed go through. If BofA walked away, Countrywide’s shares would plummet, meaning the potential risk of betting the merger will go through is high even if the chance of its falling apart now is low.
(Reporting by Paritosh Bansal and Dan Wilchins)
Photo Credit: Reuters
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Question? Why is B of A, in particular Ken Lewis, even interested in Countrywide? When Lewis took over the helm of B of A they had the number 1 or 2 lending presence in the country the prior five years. Lewis dismantled the production operation outside the bank footprint (which was highly productive) and roled the mortgage operation into the bank, one would have beleived he did think the management team in the mortgage operation was up to the task. Real truth is he thought mortgage production employees made too much money and he did not (does not) like the cyclical nature of the mortgage business. Banks like steady upward growth, not cycles. Additionally he did not like the balance sheet exposure the mortgage servicing and pipeline brings. So, why does Ken Lewis want to buy the largest mortgage production operation in the country, knowing what we know? Because it’s a good buy? What about the exposure? If I were a Countrywide employee would I be concerned about income and job security? What about mortgage offices outside the bank footprint? Might Ken Lewis sell of the branches and liquidate the servicing portfolio worth many, many tens of billions? He does not like the mortgage business. It is a product we offer to our bank customers, that IS the philosophy. If you are a Countrywide originator do you want to offer a product to a bank customer? Countrywide, I am crying for you!!
- Posted by Former B of A Reional Mortgage Manager