Wednesday, November 21, 2007

Marginalizing Bank Of America

If BoA were a trader in the pit, ball-breaking colleagues would be asking,

How much more CFC do you want?

CFC is Countrywide Financial Corporation, a ravaged mortgage lender. Look at its precipitous decline over the past five months from $40 to $9.56 per share as I type this.

As the stock was sliding towards bankruptcy, Bank of America made a $2 billion investment in Countrywide. The stake took the form of warrants (long term call options) with a strike price of $18. Roughly speaking, Countrywide shares were trading for just over $20 at the time.

Back when the news broke, I predicted that BoA would be buying more Countrywide - at a lower price (see my comments in this thread). As the stock is now south of $10, the "lower price" is available. Bank of America may be prohibited from buying more - I am really not up on all of the banking legislation. Regardless, they should have waited a few months and gotten a lower strike price.

No comments: