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Bank of America (BAC) is going to invest $2billions in Countrywide (CFC) via non-voting convertible preferred securities of CFC that pay an annual interest rate of 7.25%. They can be converted into common stock at $18 a share. If that happens, Bank of America won’t be able to trade the stock for 18 months after conversion, the two companies said in a statement. Great news for CFC as well as for Bank for America (Assuming 2 billion can revive CFC). So the rumor of Mr Buffet investing into CFC has some truth in it as he has decent investments in BAC.
So $18 and current price around $23-24, that’s cool >20% discount (assuming it doesn’t go down further). But CFC still has long way to go to muster over $10billions that it needs. And in the worst case, if it happens, CFC files for bankruptcy, BAC loses all. Enron’s and Worldcom’s failure is still so fresh in my mind. Where does it go from here only time will tell us. I expect volatility to go up in BAC (Current ATM IV is around 21%, I’ll check it after a few days to confirm my hypothesis) and I would rather get into puts for BAC while hedging upside at the same time.
If you are thinking it’s a bull chase now for CFC, think again and hard, whatever you choose, trade carefully,
Profitable trading, OP
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