B of A and Countrywide – This is Round 1 of the Bank Mergers of 2008 and 2009
Over the next year or two there will be a number of additional mergers between large institutions. By the way, the press likes to call them mergers. Make no mistake they are not mergers. A larger healthy bank is buying a smaller weaker bank so that everyone does not have to deal with a bank failure. This is how the system is designed to work. Text in bold is my emphasis. From Yahoo:
Similar deals are expected to follow Bank of America Corp's agreement on Friday to acquire battered mortgage lender Countrywide Financial Corp for a knock-down price of $4 billion in stock.
As the mortgage crisis and credit crunch take their toll, merger speculation is now centered on other lenders including Washington Mutual Inc, First Horizon National Corp, National City Corp, and KeyCorp.
All have suffered mortgage and real estate-related problems and shares in all four rose on Friday on the Countrywide deal.
Analysts also talked up the possibility of Bear Stearns Cos Inc being involved in a major transaction, despite a statement on Tuesday by its new chief executive, Alan Schwartz, that being acquired is not a strategy for the firm.
A trader of mortgages and mortgage-related investments, Bear Stearns took a $1.9 billion write-down in the quarter ended November 30, reflecting the reduced value of subprime mortgage-related securities. Its shares also rose on Friday.
"Transactions happen when times are good and valuations are high and they happen when times are very difficult and you have some forced sellers," said Sean Egan, managing director of independent credit-rating firm Egan-Jones Ratings Inc.
"Washington Mutual probably heads up the list (of targets) because they have similar problems to Countrywide," said Egan, adding: "Bear Stearns is an obvious candidate for some sort of transaction." (It has been reported that WAMU is in preliminary talks with J P Morgan.)
Bank analyst Richard Bove of Punk Ziegel & Co said possible buyers for Washington Mutual could be Wells Fargo and Co and JPMorgan Chase & Co Inc. He also believes National City could merge with KeyCorp at some stage.
Sandler O'Neill analyst Michael Taiano cited CIT Group Inc as a potential takeover candidate for a company that could cut its cost of funds, such as GE Capital (GE.N) or an international financial institution.
"The announced sale of Countrywide today, along with further press speculation regarding a takeout of Washington Mutual, could fuel takeout speculation for other specialty finance names whose valuations have plummeted, including CIT, providing near-term support for the shares," Taiano said in a research report.
Regulators and politicians in Washington are very keen to see troubled lenders find solutions to their problems, experts said.
Egan said the Federal Deposit Insurance Corp did not want to deal with the potential failure of Countrywide.
And Bove said: "The people in Washington must be having fits about what would happen if a bank or a thrift with $55 billion in assets went under, so I think they pushed Countrywide hard in this direction."
Markets faced renewed concerns over the banking sector on Friday after a report claiming Merrill Lynch & Co Inc is expected to suffer $15 billion in losses stemming from wrecked mortgage investments and UBS said it could not predict the final impact of the subprime crisis.
The deal for Countrywide is seen as a move that could help avert one of the biggest collapses in the U.S. housing crisis.
"I would not be at all surprised to see another half-a-dozen (similar transactions), I would not be at all surprised to see more (subprime) write-downs," said Jim O'Shaughnessy of O'Shaughnessy Asset Management.
"When you look at what will be in my opinion a series of these type of takeovers, you'll see that the acquiring party has obviously done their homework," O'Shaughnessy said.