Remember that Ken Lewis, BofA CEO, bought a big stake in CFC back in August for $18/share of the mortgage lender.
CFC closed below $8/share yesterday.
Is this an opportune deal for the money center bank?
BofA has only matched the index for most of the past five years, recently underperforming. Countrywide stalled for much of the past five years, after an initial outperformance burst in 2003. After that, housing sector weakness began to affect investor confidence in the long-term position of CFC.
As this morning's Wall Street Journal article on the deal observed, BofA is protecting its own interest in the ailing mortgage company. If it were to go bankrupt, BofA's prior investment would become nearly worthless, and Lewis would look especially foolish.
So, basically, what we have is a very large money center bank using its 'cannot fail' position to buy a potentially dead mortgage lender, in which it already has a significant equity position. It is, in essence, borrowing from the Fed/economy, long, to buy an investment before that investment's value goes to nearly zero.
Of course Lewis casts this as a vote of confidence in the long term viability of CFC and mortgage markets. And he's right, given a very long time horizon.
The question is, were Lewis not already an owner of CFC, and at a much higher price, would he be rushing to buy it now? With his own loan losses potentially looming this quarter, and perhaps a need for more capital?
My own opinion is that two mediocre companies do not, generally, when combined, make a better resultant company. I think this is strictly a case of salvaging a soured investment. On that basis, it may make accounting and short-term capital sense for BofA.
But it begs the larger question of whether Lewis used, and will continue to employ, flawed judgment in both buying a stake in CFC at more than double today's price, and running the giant money center bank in the future.
By the way, I don't own any BofA. It doesn't look like I will be buying any for the forseeable future, either.