Bank of America Knows Something

Bank of America (BAC) just dropped $2 billion on what looks like incredibly advantageous terms into Countrywide (CFC) The dividend yield at 7.5% is outstanding and being able to convert into stock at below the so called current market value has usually been only an investor fantasy. So much for all the Warren Buffet speculation.

We all know Countrywide needs help. When it gets this bad the question is what is good for the economy not what is good for an individual issuer. Everyone will surely remark on Countrywide's lack of negotiating ability. Countrywide's ability to negotiate was mitigated by the large caliber financial gun that was firmly pointed to its forehead.

Big players like Bank of America can and will do favors for the regulator in the hopes of something else breaking their way. The current favor is probably tax deductible if the mark to market moves unfavorably. Bank of America is close to bouncing off of the 10% deposit cap, when taking the ABN LaSalle acquisition into account. So while an offical outright acquisition seems to be out of the question if Bank of America can help Countrywide settle down the fed should be beholden in a strategic fashion at some point in the future.

The danger is that if the sub prime slime compromises the deal a huge negative develops in the market and accelerates panic thinking. The line needs to hold. The sharks will test the steel cage quality of the deal. If there are chinks the slide will continue for quite some time.

In the meantime another savvy player Citicorp (C) dips into the discount window and takes out armful of money. The Fed has pointed out that under the circumstances they would not see this as a sign of weakness. So the thinking is different.