Whither Countrywide?

While I’m on the subject of bank valuations, it’s worth revisiting Countrywide,

which is now languishing at about $16.50 per share and looking

for a second white knight to come in and provide much-needed operating

capital. At the beginning of August, I noted

that investor Dave Neubert thought that a price-to-book ratio of about 1 looked

like a great buying opportunity, so he added to his position at $25.96 per share.

That price-to-book ratio is now 0.66. Oops.

The question of how far Countrywide will fall is an interesting one, because

it helps put a real market-clearing price on an enormous portfolio of subprime

loans. Obviously the market no longer has much if any faith in Countrywide’s

own estimation of its book value – the value of all those loans it holds.

But there are clearly also concerns about Countrywide’s solvency: it has $124

billion in debt, and a market cap of less than $10 billion. If this crunch continues,

that last sliver of equity could be wiped out pretty easily. No financial institution

can survive if its lenders don’t have confidence in it, and confidence in Countrywide’s

survival seems to be evaporating rapidly.

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