Countrwide (CFC) "Contained", WaMu (WM) Next

Miracles do happen.

The Plunge Protection Team errr, The President's Working Group on Financial Markets meets, and not a week later we have a bid for Countrywide (CFC). It is almost amazing in the timing, eh? Oh, to be the fly on the wall during that conversation...

I wrote this on a message board last night

Call me a conspirasist but I think the govt is doing this
Citi can't do it, so BAC is 2nd largest, absorb this piece of (edited for language! haha) and we'll make sure you are ok on the other side.

Now we need to find someone to buy WaMu and then we have about 40% of the US mortgage market "saved".

******
Here is the reality, a Republican administration does not want to be seen bailing out a leading financial institution with tax dollars. Further, a CFC bankruptcy would of caused serious panic as I believe they do about 20% of the country's mortgages. It would kill confidence. Rightly or wrongly, the sharks have been circling Countrywide and many bankruptcies are accelerated by lack of confidence... i.e. vendors stop sending product to a mfg because they are afraid of not getting paid back, bank lines of credit dry up, etc. So it feeds on itself. This is the scenario that has been playing out with Countrywide.

Not to mention the facts on the ground i.e. 7% of Countrywide loans are now delinquent up from 5% a year ago. Foreclosures almost doubled. And that's coming off a "great" 2007 in the economy. These don't sound like huge numbers, but again we are just ENTERING the real credit mess, most of these 2 year ARMs are just now jumping (and will be continuing to do so throughout 2008). People will try their best to pay for a few quarters (or use credit cards to pay mortgages) and then eventually succumb in due time. So the height of defaults will probably hit about a year from now and into 2009. Countrywide won't last that long. 9%, 11%, 13% delinquency rates a year from now would be a nail in the coffin of Countrywide.... they are dependent on new funding and their lines of credit would dry up. (one could argue they still have their bank deposits, but did you see the lines at Northern Rock once panic hits?) [Northern Rock Drops 30% Today]

So what do we have here instead? We have one of our stronger banks, Bank of America (BAC) buying a company on life support. With the government implicit backing. And trust me the government will be helping Bank of America on the back end, "behind closed doors". Because these loans are like asbestos. They have huge future unknown liabilities. Would anyone buy a company with asbestos exposure in the 1990s, knowing the huge future liabilities? No. But if you have the government doing a behind the scenes bailout for you, it gives you entry into the mortgage market, a 20% share, and you have a good enough balance sheet to live through the next few years, and then when we come out of this in 3-4 years you have a dominant position in a great long term business (mortgages). Countrywide alone wouldn't make it through another year, not to mention the 3-4 years. And keep in mind Bank of America was in talks to potentially acquire CFC in the $40s a year ago. And then they paid $2 billion around $18 just in August. So to get the franchise for under $7, and a $4 billion price tag is nothing. $4 billion? Companies write that off every month nowadays in the financial world.

Next? The other dog, Washington Mutual (WM). I am sure the same arrangement will be made for implicit government behind the scenes bailout of whomever takes over WM. It won't be Citigroup since they themselves are in such a bad situation but it will be one of these top 5-7 banks like a Wells Fargo (WFC) type who actually ran their business reasonably well (again it's all relative) and has no SIVs or off balance sheet junk. And in the long run it will strengthen their business just like the situation with Bank of America. But you need to be strong enough financially to weather the next 1-2 years to get out "the other side". Maybe its next week, maybe its next month, but within 6 months I would expect WM to be taken out. And as investors we won't have to hear about this issue day in and day out. So it's 'containable' from that perspective. And about 35%+ of our mortgage market will go from "weak hands" to "strong hands" (those who can handle asbestos exposure for the next few years), and the needed write downs on this portfolio can continue in the background - and your US tax dollars can make sure it all works out well in the end.

From a stock market perspective, this is a win as these 2 dogs won't be the underpinnings of angst on a daily basis. From a "free market" perspective - well it's laughable.