Even if Bank of America pays a huge premium (let's say 40%) to Countrywide's current share price (which is around $8), the deal would still be far below the lender's book value, which is about $26 a share.They actually accept Countrywide's book value matter-of-factly at $26. After all that is going on with these write-offs and lack of reliability in subprime -- including talk of a more colossal expected write-off by Merrill -- how, how, how can Countrywide's book value be written with a straight face? So the moral of today's story is that when The Business Press Maven's "Herb Index" flashes red, be doubly cautious.
When the market finds itself bombarded by news that the nation's largest home lender has mercifully been
taken over, as well as slightly wilder chatter that airlines will hitch, and absolutely crazy talk is revived on the thinly sourced Microsoft ( MSFT)- Yahoo! ( YHOO) rumor from the same publication that has touted the deal 100 times, you know times are strange. Then add in the Federal Reserve getting tongues panting everywhere when it says it will lower interest rates to the sub-floor to keep a chicken in every pot, and you know things are really weird. But how do you know when we have entered a truly crazy period that may be rife with opportunity but definitely requires a redoubling of caution and plenty of the Business-Press-Maven-proven "source analysis"? When a man named Herb starts speculating. Yes, folks, for the first time in modern history, The Business Press Maven's "Herb Index" is flashing caution. Let me explain. The Business Press Maven, with his experience on both Wall Street and in journalism, is obviously very critical of the business media, which have turned my soul into unadulterated rot. But if more of what I've read over the years had been written by MarketWatch columnist Herb Greenberg, I'd have cuddling ponies dancing in my soul. Clear-eyed, courageous and willing to dig where others aren't while keeping his flights of fantasy to a bare minimum, Herb is simply one of the all-time greats. If more were like him, I'd be a professional critic of bridge, not of business coverage. So how do I know we've entered a crazy time period that merits overwhelming caution? Herb appears to have gone temporarily insane in the membrane.
On his blog yesterday after the market closed, Herb carried on about the now-announced Countrywide ( CFC)- Bank of America ( BAC) merger. That itself is fine. Scour the reports from The Wall Street Journal and The New York Times, which led the coverage, and you will see sources that, although anonymous, were defined and appeared close to the action, which turned out to be definitive. But what does Herb weigh in with yesterday? A theory, which might very well be true but could also be cockamamie, that the Fed is behind the deal, because the Countywide impending bankruptcy rumors were true. But -- and this part made me dab at my eyes with a hankie -- he wrote, "as part of the deal, the government likely agrees to guarantee BofA against Countywide-related losses." Okaaaaaaaaaaay. The government is giving Bank of America a free pass as a thank-you for not letting Countrywide go soft-white-underbelly-up. Even when reading Herb, I have to ask: Sez who? He doesn't say, only remarking that "it appears apparent," though he does make clear, in fairness, that he is playing a "guessing game." Still, when Herb, generally the class of the field, starts getting all jiggy with conspiracies -- whoa! But please, please, please don't get caught up in it. Review the process of source analysis so you are not likely to be taken by rampant, thinly-sourced speculation, stories often planted by money managers taking advantage of
gullible journalists in need of material and aching for that elusive scoop. And remember that even when a rumor (like Countrywide-Bank of America) does appear to be true, there is plenty to be careful about. Look at this passage from a Forbes story, trying to peg a price on the then-potential deal: