Well it looks like Bank of America's announcement that they want to walk away from some of Countrywide's loan portfolio is finally hitting Wall St.
I warned everyone last week after seeing the Bank of America statement that this would eventually make waves on the street. The markets are taking a nice hit today on this news along with the Yahoo blowup.
Here is the scoop from Bloomberg:
May 5 (Bloomberg) -- Bank of America Corp., the second- biggest U.S. bank, should abandon its $4 billion takeover of Countrywide Financial Corp. because the mortgage lender's loans will hurt earnings, according to Friedman, Billings, Ramsey & Co.
Bank of America's proposed purchase of Countrywide, the biggest U.S. mortgage lender, may result in a writedown of as much as $30 billion, analysts led by Arlington, Virginia-based Paul Miller wrote in a note to clients. Miller cut his rating on Countrywide to ``underperform'' from ``market perform'' and lowered his price target to $2 a share from $7.
The lower price target ``reflects a high probability that Bank of America renegotiates the deal,'' the analyst said. "
Countrywide's credit rating was unexpectedly cut to junk on May 2 by Standard & Poor's, which cited doubt about whether Charlotte, North Carolina-based Bank of America will back the home lender's debt after a pending takeover is completed. S&P made the cut two days after saying it might raise Calabasas, California-based Countrywide's ratings."
OK, lets read in between the lines here. Countrywide is basically worthless. If Bank of America hadn't come in and bought this company they would be in chapter 11 or out of business. Their S&P credit rating is now junk.
In my opinion, Bank of America no longer wants this company and the deal is dead unless the Fed bails out the $38 billion in bad loans that BofA wants no part of.
Its amazing when you think about it. The largest player during the housing bubble is about to go belly up. Countrywide was responsible for about 20% of all of the loans done during the bubble.
There is no way the Fed bails out Countrywide because the "moral hazard" is simply too great. If you take on Countrywide's bad loans, then every other bank in the country will want their bad loans bailed out as well. The Fed won't do this.
Countrywide will end up as a zero folks. The only way BofA takes on this Countrywide is through a deal where the other banks or the Fed agree to share in taking the $38 billion dollar hit.
Expect the Fed to pass. Its one thing to save 1 investment bank when there are only a handful of players. If you attempt to bailout 1 commercial bank when 1000's more have the same problems, you are asking for trouble.
The Fed has been acting reckless but I can't see them being this stupid. Without the bailout, the deal is dead, and it will be a real blow to the housing and financial markets. Without Countrywide in the game, the lending will only get tighter as the number of players shrinks.