Countrywide CEO Takes the Punch Bowl Away

After Mozilo's gloomy comments, it was hard for the markets to perceive Bank of America's $2 billion stake in the company as anything but opportunistic for BofA, which like many banks and Wall Street firms faces some of its own liquidity and balance sheet issues amid the credit crunch.

Indeed, Bank of America's little "confidence boost" was quite a lucrative trade for the mega-bank, and maybe better considered in the context of distressed investing.

Firms like Blackrock, TCW Group and hedge funds like Citadel, among many others, are amassing funds to invest in the distressed assets that will wind up on the bargain basement sale floor. Why shouldn't BofA get in the game? Certainly the markets have been abuzz with what value investor might be sniffing around at Countrywide.

The art of this trade, however, is that BofA gets paid interest for taking the stake and making its bet that Countrywide will exist in 18 months. The banks also gets paid while considering a full-out purchase of the mortgage lender.

Countrywide will pay BofA annual interest of 7.85%, or $157 million a year in perpetuity. If BofA chooses after 18 months, the company can monetize its stake by converting the securities into shares of Countrywide at $18 per share. Countrywide closed Thursday at $22.02.