CFC is down about 15% today on an FBR analyst call that BofA will renegotiate their deal. He has a price target of $0 to $2 and cites BofA's May 1st filing that states there is no assurance that any of CFC's debt will be assumed. I agree with the analyst's call that this is a first step in a renegotiation process over the acquisition of Countrywide. I actually think there is a strong possibility that CFC will just go bankrupt. A quote from the report:
"Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America's earnings due to the elevated credit expenses at Countrywide, analyst Paul Miller wrote in a note to clients...
If mark-downs on Countrywide's loan portfolio are less than $22 billion, then Bank of America can likely offset the adjustments with fair value debt adjustments and the difference between tangible equity and its purchase price of Countrywide, he estimated."
It's really tough to estimate book value for these financial companies now, but I certainly am in the camp that believes mortgage resets will lead to greater financial losses than the market currently expects. I think what we have going on here is a case of BofA looking under the hood of CFC and finding that they don't really like what they see. I think that CFC doesn't go any higher than $6.20, which was the high of its recent trading range. The original BofA acquisition price was for $7.16 a share. So with an upside of $3-5 and a downside of $1, I think we have a pretty good case here for a short of CFC. I'll be looking to get in at a better price later in the week.
