Mozilo sees the writing on the wall

Never underestimate a clever salesman. Countrywide CEO Angelo Mozilo clearly knew that without a lifeline from a better capitalized bank, his wasn’t long for this world. Why else accept $7.16 per share (in stock, not cash) for his company? I understand BAC’s motivation is to buy a bigger presence in the consumer lending market by getting the #1 mortgage lender, yet I still question why BAC decided to pull the trigger now. Perhaps Ken Lewis was worried someone else would buy CFC? More likely, he probably wants to salvage the other $2 billion he put into the company back in August. Otherwise, why not wait to buy CFC’s assets out of bankruptcy? He could save the $4 billion in stock this deal could cost him?

Besides being on the hook for CFC’s continuing losses–and there WILL be more losses of course–Ken Lewis is also buying himself plenty of legal trouble, what with all the accusations of mortgage fraud being thrown at CFC. For instance, CFC’s vaunted software programs that maximized lending profitability have been outed as a scam:

potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

But perhaps it makes sense to save CFC from bankruptcy. The company still has a decent brand on Main Street. And that brand equity would probably go to zero if the company did indeed go bankrupt.

And in any case, this isn’t a done deal. It’s not scheduled to close until the third quarter. We’ve seen just how fast the subprime wildfire continues to spread. My bet is that CFC’s situation deteriorates so rapidly, that Ken Lewis is forced to back off this deal before the scheduled close. Whatever breakup fee may be part of the deal, I imagine there’s also a material adverse change clause that gives BAC an out. Look for them to exercise it……

One tragedy of this merger is that it could keep Mozilo out of prison. I’m speculating above my pay grade here as I have no legal background, but seems to me that CEOs of bankrupt companies tend to make easier targets than those of going concerns. But TYCO’s Dennis Kozlowski got nailed. So there’s hope.

Another tragedy could be Mozilo’s payday. According to the NY Times:

He could be entitled to an exit package of roughly $72 million. That would be on top of the $410 million in pay, including $285 million in option gains, that Mr. Mozilo has taken home since he became Countrywide’s chief executive in 1999.

But the only people who lose are CFC, er, BAC shareholders. That’s the beauty of the American economic system. Among the folks paying the dearest price for the subprime crisis are the shareholders of the companies responsible. As it should be.

Posted in Uncategorized |