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Tuesday, January 29, 2008

Bank of America, Countrywide and What If?

Bank of America Affirms Plan to Acquire Countrywide (Update1): “Bank of America Corp. affirmed plans to buy Countrywide Financial Corp., the mortgage lender that lost $422 million in the fourth quarter, and said it doesn't need to raise more capital after last week's preferred share offering collected almost $13 billion.

“Everything is a `go' to complete this transaction,” Bank of America Chief Executive Officer Kenneth Lewis said at an investor conference today, referring to Countrywide. The Calabasas, California-based mortgage company rose as much as 8.6 percent today in New York Stock Exchange composite trading.”

They always say things are on track, until they announce they actually aren’t.
Since there is no real way to determine the odds of this deal going through you can’t get in front of it. Instead, the safer and simpler thing to do is to prepare yourself for either outcome.

Here on our trading floor we play the “WHAT IF GAME”.
Basically our traders will run what if scenarios past each other and we all start arguing about what would happen. Which products would do what?

What if the deal doesn’t go through?
What happens to BAC, CFC and equities in general?
What happens to fixed income? The short end of the curve? The shape of the curve?
What would happen to FX?
Commodities?

What happens if the deal does go through?

The second phase of the 'what if game' is to build some models and run some numbers.

That way, the INSTANT the news hits the wires we’re out executing our positions…

4 comments:

Will said...

So, what is your strategy to do to take advantage of this?

Ben Bittrolff said...

I'd personally short BAC on big spikes into resistance, waiting patiently for overbought readings. I'd use puts to avoid getting crushed if the CFC deal did fall through. BAC would probably gap up on news that it has abondoned CFC. I'd even long BAC on that news as the merger arbs are forced to bail. (Cover their BAC shorts.)

Something like that. I think there are easier pickings elsewhere though.

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