This whole BofA buying Countrywide deal has me perplexed (he said "perplexed"). My first thoughts were that this thing smelled really bad. Why would you try to catch a falling knife? Countrywide was going to $0B so why pay $4B? I'm sure the Fed put some pressure on BofA but can political favors and recognition as a market savior be worth $4B?
With this deal BofA get's to save face on it's earlier $2B investment in Countrywide and also get's to protect some bank loans it made to Countrywide at the time of the investment. However, those loans were senior so probably not that risky. Also, if you're BofA, how do you get your head around the mortgage portfolios and what about the potential liability from lawsuits, crazy asset backed securities Puts and everything else that I'm not smart enough to think about?
My guess is that there are some serious skeletons in the closet between the two companies but the merger postpones the day that those skeletons will see the light. How would like to be the accountant who is trying to determine "materiality" on disclosures around this merger, Countrywide's bookkeeping and loan valuations in general? In a typical merger, general practice is to charge every expense and write down everything you can so you can start with a fresh plate. After all, Wall Street looks through merger accounting. However, with these companies already in bed with each other before the merger, I bet there will be a tremendous amount of pressure to make things look as good as possible. Would love to be a fly on the wall in those meetings.
Yes, BofA is getting a world class mortgage lending platform, but don't they already have one of those? Plus, how much mortgage business is there really going to be in the next few years and couldn't BofA have taken share from a vulnerable Countrywide?
I hate to think the worst, but I think the fraud and liability in the mortgage sector is going to turn out to be monumental. Why increase your exposure to it? It will probably take a few years for the skeletons to come out...if there are any. It will be a fun look back. Best of luck BofA.
