Bank of America Bluffing or Holding the Nuts?

January 11, 2008 12:57 am

In Texas Hold ’em Poker, the bluff is the definitive strategy that separates bracelet winners from ordinary card players. Today, there seemed to be a bit of card playing going on in a winner-take-all scenario down at the Curb. Suspect as it seems, I wonder if this is an amazing bluff or does Bank of America hold the unbeatable, unbreakable hand also known as “the nuts”?

Poker or Investing.. What is the Difference?

Back in August, I speculated (Last Man Standing) that Bank of America (BAC) would become the logical suitor if Countywide’s (CFC) solvency problems continued. The idea that was presented was simple: If Mozilo took the $2 billion hand-out infusion, he would have to soften his attitude towards a merger since this would be one of the only ways to keep his beloved company intact.

The article concluded with the thought that, “Either way, Bank of America will surely be one of the last ones standing. The wild card will be if they do it with, or without, Countrywide by their side. Even though Countrywide CEO Mozilo currently denies any merger talks, he will surely warm up to the idea if the sub-prime mess worsens and his company continues to suffer.”
Now, after four tortuous months for the industry, Bank of America may be realizing that they may of been slightly premature with their $2 billion gift. Since August, with news circling along side of the vultures, CFC has been in a free-fall due to fundamentals and panic selling. The big problem for BAC has been that their money is evaporating faster than ice in the Gobi. Even thought the original deal calls for CFC to sell BAC 7.25% preferred shares that could be converted into common stocks at a price of $18.
Bank of America in talks to buy Countrywide: sources: Reuters Business News: CFC – MSN Money

Bank of America in August bought $2 billion of preferred shares convertible into a roughly one-sixth stake in Countrywide. Analysts have said that investment made the bank — whose own profitability is suffering from rising credit losses — an obvious candidate to buy Countrywide, eventually.


Looking back, the only thing that may have been keeping up down with the performance of CFC shares is CFC-A preferred shares. As the potential for a bankruptcy squeeze mounted, preferred shareholders were bailing out at any price. Here is where the plot thickens….

Fast Forward
It will come as no surprise when in a few days, after the excitement from the stunning rumorannouncement rumor dims, Bank of America denies any additional progress towards an acquisition. Mozilo will continue his general denial and continue to look for hope that he can do this without any physical intrusion or merger. Sure he will be glad to take your money and issue a few more shares of a convertible preferred. Of course he will also deny any wrong doing on his or management’s part. (Did you catch the recent news investigations into about oversight issues and improper practices?) If this is a poker game and Mozilo is one of cards from the deck, he would surely be tagged as the “Suicide King” by the way he runs his company. into the ground.

Reality Check

It is nothing short of dubious that on the day that Bernanke is scheduled to speak on the state of the economy along with the 100% probability built-in for a rate cut approaching 50bps that a well timed rumor/announcement appears, vaulting the shares of CFC. What is even more interesting is the fact that the day before, the stock was halted on concerns over the news of another investigation. Top it off with a troubling announcement by Goldman Sachs that they believe that recession is imminent and investors were set-up for an emotion charged afternoon. It shaped into a perfect opportunity for BIG shareholders to trim losses from an well timed and well place yet unsubstantiated rumor.

Watch closely over the next few weeks as the carefully crafted words will surely help us uncover the “tell” that will give us better insight into what hand is held by both CFC and BAC. If BAC does follow through with some type of merger, it would be to the initial detriment of BAC bond investors. The ratings companies will surely knock a few off of BAC’s rating for that move. If they don’t, it will be more pain for CFC until they can get some breathing room and build confidence with investors. Either way, the confusion and anticipation surrounding this very complex situation will provide for many short-term trading opportunities and a good amount of drama, even in the face of the continuing writer’s strike.

Any trading should be carefully thought out, hedged and if an overnight position is maintained, keep a close eye on the news ticker.

Andrew’s Book on Amazon:The Disciplined Investor – Essential Strategies for Success

Disclosure: Horowitz & Company clients hold positions LONG in CFC

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