Monday, May 5, 2008

Bank of America/Countrywide

From CBS Marketwatch:

Shares of Countrywide Financial Corp. fell more than14% on Monday after an analyst called on Bank of America Corp. to scuttle plans to buy the nation's largest mortgage lender because of the falling value of its loan portfolio.

My guess is Bank of America thought that in purchasing Countrywide they (B of A) would be increasing the size of its mortgage business after the current housing mess ends. My guess is B of A is starting to uncover some really ugly problems at Countrywide:

FBI Director Robert Mueller said the agency's investigations into the subprime loan meltdown may uncover financial crimes committed by hedge funds and private equity firms.

Federal Bureau of Investigation agents have opened 19 criminal probes of companies in connection with the lending crisis, focusing on accounting fraud, insider trading and allegations of deceptive sales practices. Mueller, speaking today to an American Bar Association group in Washington, said he expects more to come as housing prices continue to fall.

``These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds,'' Mueller said. ``We do not take these investigations lightly.''

The collapse in the credit markets has shaken Wall Street and forced people from their homes. Mueller told Congress yesterday that the FBI has seen a ``tremendous surge'' in fraud cases related to subprime loans, which are made to borrowers with poor credit.

Mueller didn't name any companies or hedge funds. A person familiar with the matter has said the FBI is probing Countrywide Financial Corp., the U.S.'s largest mortgage lender, for possible accounting fraud.

A contract of this size and magnitude will have a clause to the effect that any sign of criminal activity will break the deal. Even if the merger papers don't have that clause, there is an old adage that "you don't buy a lawsuit", meaning B of A could go to court and say, "You honor, there are just too many legal issues here."

My guess is we'll start to hear more of these rumblings over the next few weeks/months.