The Short View: Countrywide crunch/Bank of America to invest $2bn in mortgage giant/BofA elaborates on Countrywide
The Short View: Countrywide crunch
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 23 2007 18:05 | Last updated: August 23 2007 18:05
Will the money market crisis of the past two weeks come to be known as the Countrywide Crunch? For days, confidence in the largest US mortgage lender ebbed and flowed in line with confidence in money markets.
Originating 17 per cent of all mortgages in the US, mostly not in the troubled subprime sector, and relying on money markets for its funding, it made sense for the company’s fortunes to preoccupy markets.
Thus Countrywide shares and Treasury bills moved almost in alignment. News that it had failed to raise funds by means of commercial paper last Thursday morning raised fears the liquidity crunch could bring down the company. Its shares fell 40 per cent in hours.
The yield on the three-month T-bill also fell 50 basis points in hours, as investors fled anything that might have mortgages for collateral.
That prompted many to reckon – it appears correctly – the Federal Reserve had no choice but to act. Countrywide stock, and T-bill yields, bounced on Thursday afternoon, and again after the Fed announced it was cutting its discount rate on Friday morning. Countrywide was up 60 per cent from its low point, four trading hours earlier.
Then confidence ebbed again. Countrywide stock fell back as T-bill yields collapsed. But on Tuesday and Wednesday, we saw a return of confidence to both, assisted by handling from the central banks.
But the response to Bank of America’s vote of confidence, late on Wednesday, when it said it would buy a $2bn stake in Countrywide, suggests fears are more widely spread. Even with such uncertainty removed, markets failed to rally.
Countrywide drifted lower. And ominously, three-month T-bill yields stayed more than 25 basis points below their level when the Fed cut the discount rate, and a stunning 175 bps below the Fed Funds rate.
That shows even without fears of a Countrywide collapse, the market remains desperate for a cut in the Fed Funds rate.
Bank of America to invest $2bn in mortgage giant
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: August 23 2007 00:11 | Last updated: August 23 2007 00:51
Bank of America, the second-largest US bank, plans to invest $2bn in Countrywide Financial, the troubled mortgage lender.
The move came after the Financial Times first reported in January that BofA, which is eager to expand its mortgage business to match its breadth in credit cards, was in talks with Countrywide about a possible acquisition or joint venture.
BofA will take the stake in the form of preferred shares that can be converted into common stock at $18 per share. The $2bn stake would represent about 16 per cent of Countrywide’s $12.6bn market value.
At the time talks were first reported, analysts said a deal would make sense because it would allow BofA to expand its mortgage business while giving Countrywide added financial muscle to withstand the current housing downturn.
The announcement last week by the US’s biggest mortgage lender that it would tap into an $11.5bn credit line from 40 of the world’s largest banks to boost liquidity caused concern among investors and regulators.
Countrywide turned to its banks after losing access to the commercial paper market amid the global credit squeeze. Ratings agencies responded with cuts to Countrywide’s credit rating.
Countrywide’s troubles helped spur the US Federal Reserve’s cut on the rate it charges banks for loans.
Countrywide shares have fallen more than 50 per cent since February and closed on Wednesday at $21.82. The decline has come amid a surge in defaults by US mortgage borrowers. Countrywide shares rose nearly 19 per cent in after-hours trading.
Countrywide took out full-page advertisements in US publications on Monday saying it was “a well-capitalised federal savings bank with more than $100bn in assets” and that “the future is bright”. The move failed to stop the slide in the lender’s share price.
Countrywide has about $60bn in consumer deposits in its bank unit and has said that it would use those deposits to fund loans.
In a statement, Kenneth D. Lewis, Bank of America chairman and chief executive, said: “We believe that in the current turmoil the stock market has been underestimating the value in Countrywide’s operations and assets...This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country.
“We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets. Countrywide has a strong mortgage origination business and it services the mortgages of one in seven American households.”
BofA elaborates on Countrywide
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: August 24 2007 01:13 | Last updated: August 24 2007 07:08
Bank of America has the right to match any buy-out offer for Countrywide Financial, according to a filing made as part of BofA’s $2bn preferred share investment in the troubled mortgage lender.
However, BofA cannot make any attempt to acquire more shares in Countrywide or buy the company outright unless such a move comes in response to a competing offer, the filing said.
In an interview on CNBC on Thursday, Angelo Mozilo, Countrywide chief executive, said he had not considered selling all of Countrywide to BofA. However, he acknowledged holding talks with BofA earlier this year about a joint venture.
On Wednesday BofA said it would pay $2bn for preferred shares in Countrywide, paying an annual dividend of 7.25 per cent.
The shares are convertible to common voting stock at $18 per share and would amount to a 16 per cent stake in Countrywide, which saw its share price slide after it lost access to one of its traditional sources of liquidity, the commercial paper market. Countrywide, the largest US mortgage lender, last week was forced to tap its $11.5bn in bank credit lines, driving its shares down further and sparking rumours that it might be forced into bankruptcy. Mr Mozilo on Thursday dismissed those rumours as baseless and called BofA’s investment a “great endorsement” of the company.
Mr Mozilo added that he did not believe the credit market situation was improving and that he continues to believe housing woes will drag the US economy into recession.
”I’ve seen this movie before, and the ending of the movie always ends up in some form of recession,” he said. ”I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what’s going to happen next.”
Countrywide shares initially spiked on BofA’s investment.
But they declined following Mr Mozilo’s remarks about the credit markets and the economy and after analysts noted the very generous terms BofA received for its investment. Countrywide shares closed up 0.92 per cent at $22.02 in New York, close to where they were before BofA’s investment.
Also in the filing yesterday, Countrywide said BofA has the right to name two directors to the company’s board if Countrywide fails to pay dividends on the preferred shares for six quarters.
By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: August 23 2007 18:05 | Last updated: August 23 2007 18:05
Will the money market crisis of the past two weeks come to be known as the Countrywide Crunch? For days, confidence in the largest US mortgage lender ebbed and flowed in line with confidence in money markets.
Originating 17 per cent of all mortgages in the US, mostly not in the troubled subprime sector, and relying on money markets for its funding, it made sense for the company’s fortunes to preoccupy markets.
Thus Countrywide shares and Treasury bills moved almost in alignment. News that it had failed to raise funds by means of commercial paper last Thursday morning raised fears the liquidity crunch could bring down the company. Its shares fell 40 per cent in hours.
The yield on the three-month T-bill also fell 50 basis points in hours, as investors fled anything that might have mortgages for collateral.
That prompted many to reckon – it appears correctly – the Federal Reserve had no choice but to act. Countrywide stock, and T-bill yields, bounced on Thursday afternoon, and again after the Fed announced it was cutting its discount rate on Friday morning. Countrywide was up 60 per cent from its low point, four trading hours earlier.
Then confidence ebbed again. Countrywide stock fell back as T-bill yields collapsed. But on Tuesday and Wednesday, we saw a return of confidence to both, assisted by handling from the central banks.
But the response to Bank of America’s vote of confidence, late on Wednesday, when it said it would buy a $2bn stake in Countrywide, suggests fears are more widely spread. Even with such uncertainty removed, markets failed to rally.
Countrywide drifted lower. And ominously, three-month T-bill yields stayed more than 25 basis points below their level when the Fed cut the discount rate, and a stunning 175 bps below the Fed Funds rate.
That shows even without fears of a Countrywide collapse, the market remains desperate for a cut in the Fed Funds rate.
Bank of America to invest $2bn in mortgage giant
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: August 23 2007 00:11 | Last updated: August 23 2007 00:51
Bank of America, the second-largest US bank, plans to invest $2bn in Countrywide Financial, the troubled mortgage lender.
The move came after the Financial Times first reported in January that BofA, which is eager to expand its mortgage business to match its breadth in credit cards, was in talks with Countrywide about a possible acquisition or joint venture.
BofA will take the stake in the form of preferred shares that can be converted into common stock at $18 per share. The $2bn stake would represent about 16 per cent of Countrywide’s $12.6bn market value.
At the time talks were first reported, analysts said a deal would make sense because it would allow BofA to expand its mortgage business while giving Countrywide added financial muscle to withstand the current housing downturn.
The announcement last week by the US’s biggest mortgage lender that it would tap into an $11.5bn credit line from 40 of the world’s largest banks to boost liquidity caused concern among investors and regulators.
Countrywide turned to its banks after losing access to the commercial paper market amid the global credit squeeze. Ratings agencies responded with cuts to Countrywide’s credit rating.
Countrywide’s troubles helped spur the US Federal Reserve’s cut on the rate it charges banks for loans.
Countrywide shares have fallen more than 50 per cent since February and closed on Wednesday at $21.82. The decline has come amid a surge in defaults by US mortgage borrowers. Countrywide shares rose nearly 19 per cent in after-hours trading.
Countrywide took out full-page advertisements in US publications on Monday saying it was “a well-capitalised federal savings bank with more than $100bn in assets” and that “the future is bright”. The move failed to stop the slide in the lender’s share price.
Countrywide has about $60bn in consumer deposits in its bank unit and has said that it would use those deposits to fund loans.
In a statement, Kenneth D. Lewis, Bank of America chairman and chief executive, said: “We believe that in the current turmoil the stock market has been underestimating the value in Countrywide’s operations and assets...This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country.
“We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets. Countrywide has a strong mortgage origination business and it services the mortgages of one in seven American households.”
BofA elaborates on Countrywide
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: August 24 2007 01:13 | Last updated: August 24 2007 07:08
Bank of America has the right to match any buy-out offer for Countrywide Financial, according to a filing made as part of BofA’s $2bn preferred share investment in the troubled mortgage lender.
However, BofA cannot make any attempt to acquire more shares in Countrywide or buy the company outright unless such a move comes in response to a competing offer, the filing said.
In an interview on CNBC on Thursday, Angelo Mozilo, Countrywide chief executive, said he had not considered selling all of Countrywide to BofA. However, he acknowledged holding talks with BofA earlier this year about a joint venture.
On Wednesday BofA said it would pay $2bn for preferred shares in Countrywide, paying an annual dividend of 7.25 per cent.
The shares are convertible to common voting stock at $18 per share and would amount to a 16 per cent stake in Countrywide, which saw its share price slide after it lost access to one of its traditional sources of liquidity, the commercial paper market. Countrywide, the largest US mortgage lender, last week was forced to tap its $11.5bn in bank credit lines, driving its shares down further and sparking rumours that it might be forced into bankruptcy. Mr Mozilo on Thursday dismissed those rumours as baseless and called BofA’s investment a “great endorsement” of the company.
Mr Mozilo added that he did not believe the credit market situation was improving and that he continues to believe housing woes will drag the US economy into recession.
”I’ve seen this movie before, and the ending of the movie always ends up in some form of recession,” he said. ”I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what’s going to happen next.”
Countrywide shares initially spiked on BofA’s investment.
But they declined following Mr Mozilo’s remarks about the credit markets and the economy and after analysts noted the very generous terms BofA received for its investment. Countrywide shares closed up 0.92 per cent at $22.02 in New York, close to where they were before BofA’s investment.
Also in the filing yesterday, Countrywide said BofA has the right to name two directors to the company’s board if Countrywide fails to pay dividends on the preferred shares for six quarters.
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