Countrywide CEO Takes the Punch Bowl Away

But let's say Countrywide's stock falls below $18. That would make the security less valuable because conversion would be at a cost to BofA. If that happens, the bank has the right of first refusal to buy the company outright if any other potential buyer comes knocking. Countrywide at $22.02 per share is already considered a takeover candidate.

So unlike Citadel, which just made a bet that it got Sowood's distressed credit portfolio at a great discount, BofA gets the automatic hedge of an interest payment and the option to buy more at any price. Not to mention, BofA may be shorting Coutnrywide stock, a common strategy used by convertible bond investors to hedge against stock-price declines.

It's good to see that innovation on Wall Street is not dead, notwithstanding the demise of the CDO market.