OldVet On the Logic of BofA Buying Countrywide

This one is by OldVet.

”Hanky Panky?”

In Africa the chiefs and top political leaders of countries are know as the “ Big Man. ” At Goldman Sachs, Henry “Hank” Paulson was the Big Man until getting the Treasury top post. During the meeting of the Financial Stabilization Committee last Friday at the White House, did Big Man Hank talk to Big Man Ben of the Fed? Were some trenchant phone calls made after the meeting to set up what looks like a crazy investment deal by a private bank? Color me suspicious.

Bank of America (ticker BAC) bought a big stake in Countrywide mortgage company (ticker CFC) at $18-$20 a share and is already way down on it’s initial investment. Now they come to market and buy the rest of Countrywide for $7 a share after rumors that Countrywide was going bankrupt. Bank of America’s spokesman said they’d studied the deal from all angles using due diligence. They are now doubling up on a big losing bet. Barry Ritholz over at the Big Picture made this observation.

Here’s a scenario.

1. BoA or its new unit Countrywide borrows funds from Fed short term and pledges worthless securitized assets or mortgages as collateral; or does so anonymously during TAF auctions that Fed has set up to pump cash into commercial paper markets. (The Fed has recently started taking mortgage backed securities as collateral.)

2. BoA doesn’t pay back its loans to Fed.

3. Fed writes off the mortgage paper losses and the loans. BoA gets a tax break for assets basis in excess of loans received, if any.

That’s enough incentive, I think, for Bank of America’s seat at the table as a Primary Dealer, one of some 21 banks authorized to borrow directly from the Fed.

This one was by OldVet.

Cactus here… there is another possibility… BofA is suffering from stupidity. We’ve seen a number of big players – Countrywide, Citi, Bear Stearns, and other less well-known names – get hosed here, for failing to foresee the validity of Stein’s Law (“if something cannot go on forever, it won’t”). Why assume it stopped?