Countrywide Financial Corp was expected to lead financial shares higher on Thursday after receiving a $2 billion injection from Bank of America Corp, easing fears the largest U.S. mortgage lender could go bankrupt and boosting optimism the sector will weather a credit shortage.
Wednesday's investment was announced hours after Bank of America, Citigroup Inc, JPMorgan Chase & Co and Wachovia Corp said they each borrowed $500 million from the U.S. Federal Reserve, an unnecessary but symbolic move to reassure markets that credit is available, if not always for the asking.
Analysts said the actions should support shares of financial companies, which have lagged broader market indexes as homeowner delinquencies rose and credit markets tightened, leaving dozens of lenders struggling to borrow. Since the end of May, the Standard & Poor's Financials Index has fallen 8.6 percent, and the Amex Securities Broker-Dealer Index including Wall Street banks has dropped 16.2 percent.
We view both moves as attempts to 'prime the pump' to get liquidity flowing again, wrote Lehman Brothers Inc. analyst Jason Goldberg. Since mid-July, the shares of First Horizon National Corp and National City Corp have been the hardest hit in our coverage amid mortgage concerns. This news could provide some relief to them and the group.
Countrywide shares rose $3.29, or 15 percent, to $25.10 in pre-market trading. They remain far below the $42.45 level where they began the year.
CAPITALISM AT WORK
Analysts said Bank of America's purchase of 7.25 percent preferred stock convertible into Countrywide shares could make it the latter's preferred lender. If converted, the shares would give the bank about a one-sixth stake in Calabasas, California-based Countrywide.
The investment would boost Charlotte, North Carolina-based Bank of America's exposure to mortgages, where it ranks fifth in market share, according to the newsletter Inside Mortgage Finance.
Kenneth Lewis, Bank of America's chief executive, in a statement said the investment may be a step toward a return to a more normal liquidity in the mortgage markets.
It also continues Lewis' recent practice of buying strategic stakes in companies such as student lender SLM Corp, China Construction Bank and Brazil's Banco Itau.
This is capitalism at work, said Richard Sichel, chief investment officer at Philadelphia Trust Co. Obviously, Bank of America sees value. It's the continuation of money moving and that is a positive for the market and investor confidence. It shows that Countrywide at this price is a viable company.
WALL STREET BANKS
Improved market liquidity may also help the Wall Street investment banks such as Bear Stearns Cos, Goldman Sachs Group Inc, Lehman Brothers Holdings Inc, Merrill Lynch & Co and Morgan Stanley.
Market volatility, sparked in large part by concern over soured mortgages, have caused mounting losses at a variety of hedge funds, including some at Bear Stearns and Goldman.
Meanwhile, the resistance among investors to funding riskier transactions has slowed merger activity, especially involving private equity firms, and left investment banks holding acquisition-related loans.
With the Federal Reserve providing liquidity, we believe the investment 'boycott' of fixed income portfolio managers simply won't continue, wrote Brad Hintz, an analyst at Sanford C. Bernstein & Co. August 2007 will ultimately be viewed as a unique investment opportunity -- like Lehman in the September 1998 Russian (debt default) crisis.
Hintz recommends Merrill and Morgan Stanley over Bear Stearns, Goldman and Lehman.
(Additional reporting by Chris Sanders)