Thursday, June 5, 2008

Bank of America CountryWide Watch 2

The Fed today approved the merger. Now it seems they only need shareholder approval which I believe is later this month. So, it looks as if they are staying the course despite calls for them to get out of the deal. And get out they could. I'm sure the controlling purchase agreement has sufficient language regarding deterioration and legal issues that they could easily kill the deal with no risk of legal retribution. Business deals are often driven by ego & stubbornness, and I think that is what we are seeing here.

BofA will follow one of two options. One, as I have written earlier is just to write down the value of CountryWide's loans just prior to closing. And, I mean REALLY write down to cover their worst case scenario. This will result in booking a relatively large increase to their goodwill account but not doing the deal would mean a write-off of their Preferred stock investment and the various extensions of credit to CountryWide. I wrote about this in more detail in an earlier article. Essentially this is just a clever way to transfer their loss to the goodwill account. The other option for them is to go the bankruptcy route as I also wrote about in an earlier article. It will be fascinating to see how they proceed.

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