How’s money minted? Countrywide (CFC) vs Bank of America (BAC)

The shares of Countrywide Financial (NYSE: CFC ) rose more than 50% yesterday on the back of the reports that Bank of America (NYSE: BAC ) is in talks to acquire the largest U.S. mortgage lender. Interesting! Couple of points before we dive into it.

  • CFC shares had taken a strong beating when the rumors of a possible bankruptcy filing by the company surfaced. I profited from it.
  • Company also faces many federal and state investigations for its lending and accounting practices.
  • BAC has already invested $2billions in the company which is bleeding now.
  • Extent of losses for CFC is still not available yet. Even CFC doesn’t know it.

CFC Latest B/S Jan 10 2008

Here is the latest balance sheet of CFC. Just see yourself if BAC had to buy CFC what pains it is planning to bear in return for access to a nationwide franchise and millions of clients. Per the latest release by the company, the foreclosures had doubled to 1.4% of unpaid balances at its key servicing unit and late payments also skyrocketed to 7.2% of unpaid balances. While the company had reported net loss of $1.2 billion for the third quarter of 2007, management had indicated the return to profitability by the fourth quarter of 2007, during the earnings conference call, which now looks highly unlikely, given the current financial data. Oouchhh…!

However, here is how money WAS made. According to Reuters

Unusual call trading in Countrywide Financial Corp on Thursday before news that Bank of America Corp was in talks to buy it has some option players asking if word of a pending deal had leaked to the market. About 304,000 calls compared with 248,000 puts traded in Countrywide, a combined volume five times its normal level, according to market research firm Trade Alert. The January $5 calls closed at $3.20 a contract, up from a range of 65 cents to $1 earlier in the day. The 19,000 $5 calls apparently bought before the news represented a paper profit of a potential $4 million at the end of the day, Najarian of OptionMonster said..


Attached is the intraday trading chart for CFC Jan 08, 5, Calls. You may see some spikes before the announcement. Well, this doesn’t really tell us if it was a purchase transaction, but it does give us a picture that trading was quite hectic.

American Express has announced to increase it’s reserve as it is seeing signs of a weaker economy, as card member spending began to slow and delinquencies and loan write-offs trended upward during December. Didn’t retailers cheered by saying Black Friday sales were great? Those were great because consumers were looking for bargain!

Welcome to wallstreet! Favorite hang out of “Greed(y)” and “Fear(ful/less)”!

Profitable trading, OP






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