Lender's shares drop on report

Times Staff Writer

Countrywide Financial Corp. shares took a hit Monday after an analyst questioned the value and wisdom of Bank of America Corp.'s takeover of the Calabasas mortgage lender, but Bank of America insisted the deal would go through.

The shares fell 62 cents, or 10.4%, to $5.36.

Bank of America's $4-billion offer values the stock at about $7 a share.

The tumble came after Friedman, Billings, Ramsey & Co. analyst Paul J. Miller wrote in a report that the bank "should completely walk away from the CFC deal" and predicted it would instead "renegotiate the transaction down to the $0 to $2 level."

Miller cited deteriorating credit quality at Countrywide -- which reported an $893-million first-quarter loss last week -- and speculated that the acquisition could cost Bank of America $20 billion to $30 billion in write-downs.

Countrywide's "loan portfolio has deteriorated so rapidly that CFC currently has negative equity and the acquisition will be a drag on Bank of America's earnings," he wrote, saying his firm had lowered its Countrywide price target to $2 and downgraded it to "underperform."

A Bank of America spokesman declined to speculate on a possible renegotiation of terms but said the bank would proceed with the purchase.

"The transaction is on track to close as agreed in the third quarter," the spokesman, Robert Stickler, said.

Miller's report came on the heels of Standard & Poor's Corp.'s downgrading of Countrywide's credit to junk status. The downgrade Friday was triggered by a Bank of America regulatory filing in which it said it hadn't decided how to deal with some of Countrywide's $97 billion in debt.

Although the filing anticipated that some debts would be repaid immediately after the acquisition closed, Bank of America left open the possibility that it would retain Countrywide as a separate subsidiary, responsible for paying -- or not paying -- its loans.

"This was new language to us," S&P; analyst Victoria Wagner said. "Until this filing it was our understanding that Bank of America would acquire all of Countrywide as stated in the January 2008 merger agreement. This new filing raises the possibility that this assumption is no longer true."

S&P; said it might change its rating again once the deal was done.

The question is whether Bank of America, based in Charlotte, N.C., will marry Countrywide into its existing mortgage lending subsidiaries, which would provide additional security to Countrywide's bondholders. If Countrywide were left to operate as a separate subsidiary, bondholders would have to rely on the troubled lender to repay its debts.

Countrywide's first-quarter loss was mainly the result of boosting write-offs and loan loss reserves by $3 billion. Bank of America earned $1.2 billion in the first quarter, down 80% from year-earlier levels, and added $3.3 billion to loan loss reserves.

On Monday, Bank of America shares fell 82 cents, or 2%, to $38.97 on a down day on Wall Street.



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