Finance and Economic

Time will tell if Bank of America’s purchase of Countrywide Financial Corp. winds up being a bargain or a boondoggle.

Shareholders of the troubled mortgage lender approved Bank of America’s (BAC, Fortune 500) all-stock offer by a majority vote Wednesday, removing the final hurdle to the deal and ending Countrywide’s days as an independent. Countrywide said it expected the deal to close on July 1.

But lately, some analysts have suggested that Bank of America may suffer a classic case of buyer’s remorse once it absorbs Countrywide’s (CFC, Fortune 500) $95 billion loan portfolio.

Last week, equity analysts at Standard & Poor’s slashed their rating of Bank of America stock to "sell" from "hold." They fear the Charlotte, N.C.-based bank may be underestimating the impact of rising consumer defaults and delinquencies at Countrywide, especially with option adjustable rate mortgages (ARM).

Last month, Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., warned that Bank of America’s purchase could prompt it to take anywhere between $20 billion to $30 billion in writedowns.

"BAC [Bank of America] should completely walk away from the CFC [Countrywide] deal, as CFC’s loan portfolio will prove a drag on earnings and could force BAC to raise additional capital," Miller wrote in a note.

Countrywide, the nation’s largest mortgage lender, was struggling in the months leading up to the deal’s completion. The company reported losses in its last three quarters due to soaring mortgage delinquencies and defaults by borrowers. The stock plunged from about $30 per share last August to less than $6 a share just before BofA announced the deal.

Bank of America’s concerns, however, don’t just end at Countrywide’s balance sheet.

The Senate Ethics Committee is looking into charges that top lawmakers including Senate Banking Committee Chairman Christopher J. Dodd, D-Conn. and Sen. Kent Conrad, D-N.D. got deals on their mortgages through a program for friends of Countrywide CEO and co-founder Angelo Mozilo.

Mozilo, who grew Countrywide from its modest beginnings, will leave the company but will still receive $10 million in stock from Bank of America. That’s on top of the $115 million he stood to gain after the deal was announced. He later forfeited $37.5 million in payments tied to the deal.

So far this year, Countrywide has also become the target of numerous government investigations into the company’s lending practices, including the U.S. Trustee’s office, a division of the Justice Department. Earlier Wednesday, both the state of Illinois and California filed lawsuits against the mortgage lender for misleading and deceptive practices. And that’s not to mention the glut of lawsuits brought by borrowers.

Some analysts think Bank of America most likely took litigation expenses into account when it drafted its offer for Countrywide though.

Still, Bank of America is also going to need to drastically cut back its combined mortgage operations once the two firms are finally integrated.

To that end, the company has hinted that job cuts lay ahead, saying in January that it planned to trim 11% of the combined mortgage companies’ expenses.

"It will be a long time before they need people on the servicing side and they probably will cut a substantial amount on the mortgage origination side," said Malcolm Polley, president and chief investment officer at Stewart Capital Advisors in Pittsburgh, which owns approximately 23,000 shares of Bank of America.

When Bank of America first proposed the deal back in January, Wall Street was evenly split about its merits.

Some analysts speculated that the company offered too high an asking price — the deal originally valued Countrywide at just over $4 billion and is now worth about $2.8 billion as BofA shares have fallen along with the broader financial sector in the past few months.

In addition, the deal would mean that Bank of America, which had largely avoided the subprime mess unlike many of its peers, would now be exposed to Countrywide’s risky mortgage portfolio.

Others cheered the tie-up, noting it put Bank of America in a position to expand its already vast footprint in the financial services sector, by making it the nation’s biggest mortgage lender and loan servicer.

And some large institutional shareholders in Countrywide, such as the Monaco-based hedge fund SRM Global went so far as to attack top Countrywide management, claiming that the buyout price of $4 billion was not high enough.

So is Bank of America getting Countrywide on the cheap?

Despite all the doubts regarding the deal, Bank of America’s management has stood firmly by the transaction since it was first announced.

"I think it could be a combination that really turns out to be very good strategically," said Bank of America chairman and CEO Kenneth Lewis earlier this month at an investor conference.

Lewis added that if his company correctly estimated the number of markdowns they would have to take, the acquisition "could be a very compelling financial transaction."

But if Bank of America expects any payoff from the Countrywide deal, it should be patient, noted David George, senior research analyst at Robert W. Baird & Co. Inc.

When the housing market finally turns around — and most analysts expect it will at some point — Bank of America will have a nice head start with Countrywide’s well-trained sales staff and mortgage lending technology platform.

"Over the near term, I think the Countrywide deal adds increased credit risk to BofA’s balance sheet," said George. "Longer term, it could be a positive transaction." 

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India's five-year property boom is coming to an end as the supply of housing increases, borrowing costs rise and a stock market rout erodes buying power, according to executives at two mortgage lenders.

Prices across India may drop as much as 15 percent in the coming months, said Keki Mistry, vice chairman of Housing Development Finance Corp., India's largest mortgage lender. Gagan Banga, chief executive of rival Indiabulls Financial Services Ltd., said prices in some cities may fall as much as 20 percent.

India's central bank signaled it will increase borrowing costs further after raising rates this week to the highest in more than six years, curtailing demand for loans. The nation's property market may avoid the meltdown seen in the U.S., U.K. and Spain because of lower indebtedness and a housing shortage estimated by the government at 24.7 million units, the executives said.

“Due to the state of the equity markets, many investors who would have bought a second or a third house are abstaining from doing so,'' Mistry said in a June 24 interview in Mumbai. “Genuine home buyers who are looking to buy a house for self occupation will continue to buy.'' Mistry was speaking hours before the central bank raised its repurchase rate by 0.5 percentage point to 8.5 percent.

Real estate stocks have led Indian equities to the worst six-month performance in at least three decades, with the Bombay Stock Exchange Realty Index slumping 59 percent this year. The benchmark Sensitive Index has shed 30 percent in the same period.

“The real estate sector as a whole is under pressure because of rising input costs, and the increase in interest rates,'' said R.K. Gupta, managing director of Taurus Asset Management Co. in New Delhi. Gupta manages 3.5 billion rupees and owns shares of developers DLF Ltd. and Parsvnath Developers Ltd. Higher borrowing costs “will push the developers to cut prices in the near future,'' he said.

Big Developers Safe

Still, the nation's biggest developers, most of whom raised capital from share sales in the last two years, aren't at risk of delinquency because they haven't borrowed from banks to purchase real estate, Banga said in Mumbai yesterday.

His company's sister firm, Indiabulls Real Estate Ltd., is the nation's fourth-biggest developer. The company, backed by billionaire Lakshmi Mittal, sold shares in a property trust in Singapore to raise $258 million earlier this month.

“If you don't have an interest meter running, and you just raised capital, where is the question of going belly up?'' Banga said in an interview. “I don't see any systemic damage, or a large name disappearing into thin air, or going bankrupt. The momentum has slowed down.''

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An analyst cut his rating and price target on Motorola Inc. Monday, saying the company continues to lose handset market share in North America, where nearly half of its unit sales originate.

Piper Jaffray analyst T. Michael Walkley downgraded Motorola (MOT, Fortune 500) to "Sell" from "Neutral" and cut his price target to $7 from $9.75.

The new target implies he expects shares to slip 12% over Friday’s $7.94 close.

While North American market share remains well above its global share, sales at four major wireless carriers on the continent are declining, he said.

Schaumburg, Ill.-based Motorola said in March that it plans to separate the handset business, which has been hurt by a two-year-long decline in cell phone sales, from its home and networks business.

The company said in April that it expects second-quarter handset sales to be equal to, or slightly better than, its results from the first quarter.

Walkley lowered his 2008 handset forecast to 106 million from 116 million.

He warned that the macroeconomic problems facing North America appear to have had an effect on government budgets, which could hurt the company’s enterprise mobility solutions business later this year.

So far this year, the stock has dipped 51%.

A company representative was not immediately available for comment. 

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Record foreclosures and limited access to credit will make it harder than usual to rebound from this U.S. housing market slump, the worst at least since World War Two, according to a Harvard University study on Monday.

A two-year home price drop is eating into housing wealth, curbing consumer spending and slicing away economic growth. This is unlikely to change until potential home buyers are convinced that prices have stopped tumbling, the study found.

The downturn has room to run.

The highest home loan rates in nine months and strict lending standards are keeping buyers on the sidelines, even after aggressive Federal Reserve intervention and a 16 percent national home price slide from the 2006 peak, by some measures.

“Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard, said in a statement.

“It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets,” he said. “The slump in housing markets has not yet run its full course.”

Price declines and mortgage defaults are the worst on records dating back to the 1960s and 1970s, the study noted. Job losses and falling prices intensify risk of foreclosure.

The number of homes entering foreclosure nearly doubled to 1.3 million in 2007 from about 660,000 in 2005. 

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For some time Merrill Lynch CEO John Thain has been stressing the brokerage does not need to take more write-downs or raise more capital, but his confidence may have been misplaced.

Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) was rumored to be close to issuing a profit warning on Friday and a day after Citigroup warned of substantial second quarter write-downs.

The talk was taken seriously by investors, who pushed the shares down 4.6 percent on Friday on growing concern about the investment bank’s exposure to complex debt securities and derivatives known as collateralized debt obligations (CDOs).

The Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) warning, which came in an investor conference call, had been based on similar concerns. If the fears with Merrill turn out to be justified, the bank may again have to raise capital, a move Thain said was not necessary as recently as last week.

But investors have heard that from Thain before. In April, he told the Nikkei newspaper Merrill had plenty of capital and did not need more. A few days later, he made similar comments during a trip to Japan. Two weeks later, Merrill raised $2.55 billion from selling preferred securities.

“If someone tells me that they don’t need to raise capital, that everything’s OK, I am not quite believing them,” said Jim Huguet, co-CEO of asset manager Great Companies.

Thain has also given an inconsistent message on whether Merrill would raise money through the sale of another big asset, its 20 percent stake in news and financial provider Bloomberg LP. In April, he said he had no plans to sell the stake, but earlier this month, he said he would consider such a move.

‘THE REAL CHALLENGE’ 

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Falling bank stock prices are a warning to investors not to get too attached to those fat dividend checks.

The latest struggling lender to sock shareholders is Cleveland-based KeyCorp (KEY, Fortune 500), whose shares tumbled 24% Thursday after the bank said it would slash its quarterly dividend in half to conserve $200 million annually.

But with inflation worries driving up interest rates and house prices still tumbling, the market is betting Key won’t be the last bank to cut its dividend. Unusually high dividend yields could point to coming dividend cuts at banks ranging from giants Bank of America (BAC, Fortune 500) and Wachovia (WB, Fortune 500) to regionals such as Fifth Third (FITB, Fortune 500) and Regions Financial (RF, Fortune 500).

The yield is the result of dividing the annual stated dividend payout by the current stock price. A higher number is typically better for investors, of course, because it means a bigger income stream relative to how much they’ve invested.

But in a credit crunch-obsessed market, a high dividend yield can actually be a warning signal. That’s because an increase in the bank’s dividend isn’t the only factor that can cause the dividend yield to rise. So can a decrease in its stock price.

And with banks facing sharply reduced earnings prospects due to rising credit losses and tightening lending standards, a high yield can spell trouble ahead.

Gary Townsend, CEO of Hill-Townsend Capital in Chevy Chase, Md., says bank stocks historically have yielded in the range of 3% to 4%. So any stock with a yield in the high single digits can be viewed as a candidate for a future dividend cutback.

"When you get to about 8%, that speculation becomes quite pronounced," says Townsend, a former Wall Street bank analyst.

Some of the big banks with yields around that level include Bank of America, which as a yield of almost 9% and Wachovia, whose recent price swoon has left the stock yielding more than 8% even after a dividend cut in April.

Other candidates for dividend cuts include double-digit yielders Fifth Third of Cincinnati, which yields 14% after Friday’s double-digit selloff; Regions of Birmingham, Ala., which yields 11%; and U.K.-based Barclays (BCS), which recently yielded 13%.

For now, the banks aren’t signaling any intention to cut their dividends. Representatives from BofA, Wachovia and Regions didn’t immediately reply to requests for comment.

A Fifth Third spokeswoman says the bank doesn’t comment on market speculation about its dividend and notes that decisions about the dividend are made by the board of directors, which is meeting today.

Barclays, which isn’t due to make a semiannual dividend declaration until August, told analysts on a conference call last month that it hadn’t made a decision on its payout.

"We’re active managers of capital and we have a range of options. We’re explicitly keeping all of them open today," finance director Chris Lucas said back on May 15. "We’re aware of the importance that shareholders place on dividends."

To be sure, not every bank is cutting back. CNNMoney’s Paul R. La Monica recently rattled off a list of banks whose cautious underwriting and conservative financing means their dividends are probably safe.

But no one is immune from scrutiny, given that even banks that have already reduced their dividends have, under stress, gone on to do so again.

Washington Mutual (WM, Fortune 500), for instance, cut its quarterly dividend to 15 cents from 56 cents back in December. WaMu then cut it again — to a penny a share — in April when it sold a big stake to a group led by private equity firm TPG.

Not everyone believes a big dividend yield points to a future cutback though.

Oppenheimer analyst Meredith Whitney, who was the first Wall Street analyst to predict (correctly) a dividend reduction at Citi, said last week that a chat with BofA chief Ken Lewis led her to conclude Bank of America’s dividend was safe.

Lewis later said that while he hasn’t explicitly defended the bank’s current dividend, which runs $2.56 a share annually, he thinks the bank would only reconsider its payout if the economy suffers a sharp slowdown - an outcome he doesn’t foresee.

But Townsend wrote last week at the bankstocks.com Web site that he expects BofA to cut its dividend by about 40% later this year to reduce the strain on its capital base.

Townsend points to another dividend number - the bank’s profit payout ratio, which reflects the proportion of annual earnings the bank sends out to investors as common dividends - as supporting that analysis.

He estimates BofA will spend all its projected net income this year and nearly three-quarters of its profit next year on common dividends - a trend he calls unsustainable. "The market is of a mind this dividend is too high," he says.

The dividend yield and the earnings payout ratio aren’t the only numbers to consider either. Banks that have raised capital via preferred stock sales - such as Citi and Bank of America — also agree to issue preferred dividends. And those must be paid out before any common dividends can be paid.

Finally, with house prices falling, mortgage defaults on the rise and employment growth weak, credit trends right now "are quite negative," Townsend says.

That gives banks another reason to be careful about not paying out too much in dividends — and shareholders in high-yielding bank stocks another cause for concern. 

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Shareholders of Biogen Idec Inc (BIIB.O: Quote, Profile, Research, Stock Buzz) will meet shortly to decide whether one of the world’s biggest and oldest biotechnology companies should remain independent or be put up for sale by billionaire investor Carl Icahn.

Shareholders will vote at their annual meeting on June 19 either to back Biogen’s nominees for its board, or to support an alternate three-member slate proposed by Icahn, who owns roughly 4 percent of the company’s stock and whose goal is to unlock its value through a sale.

For now, Biogen is tipped to win. Last week three proxy advisory firms issued reports backing Biogen, and while investors do not always follow the advice of the advisers, their recommendations make an Icahn victory less likely.

“If I had to handicap the outcome I’d lean a little more towards Biogen’s slate,” said Damien Conover, an analyst at Morningstar.

At stake is the Cambridge, Massachusetts-based company’s future as an independent entity. Icahn is seeking to permanently limit the board to 12 members to prevent the company from expanding the board and diluting his power.

Currently the company would be allowed to expand the board beyond 12 members.

“When you make this vote you decide either for Biogen as an ongoing concern because you believe in its products, or you opt for a disruptive board that would probably create headwinds for the ongoing business, in return for a sales premium if the company were to be sold,” Conover said.

Biogen, which sells the multiple sclerosis drugs Avonex and Tysabri and the cancer drug Rituxan, tried and failed last year to sell itself. Icahn, who urged the sale, claims Biogen deliberately sabotaged it by conducting a flawed auction. 

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There’s a taste for Budweiser even outside this country.

Anheuser-Busch (BUD, Fortune 500) rose 7% in after-hours trading Wednesday after the St. Louis-based brewer said it had received a $46.3 billion unsolicited buyout offer from rival InBev of Belgium.

The $65-a-share bid comes two weeks after the Financial Times reported InBev, brewer of Beck’s, Bass and Stella Artois, was weighing a possible offer, driven in part by the strength of the euro against the dollar and the presence of a pro-merger administration in Washington.

Wachovia analyst Jonathan Feeney said an InBev takeover may mean a leaner, meaner Anheuser-Busch.

"[There is] little geographic overlap," said Feeney in a statement. "China is the only shared market with manufacturing assets, aside from one Anheuser-Busch facility in the U.K., which leads us to believe that InBev would focus its efforts on streamlining the U.S. beer giant, a possibility which might not sit well with Anheuser-Busch distributors."

Anheuser said its board "will evaluate the proposal carefully and in the context of all relevant factors, including Anheuser-Busch’s long-term strategic plan." The company said it expects the board to make a decision "in due course," though top members of the Busch family that have run the company for generations have said they don’t want to sell.

Feeney said that the deal is far from done, as the beer industry is highly regulated, and he believes InBev overvalued Anheuser-Busch’s stock by about $15 a share.

Anheuser shares rose $4.15 to $62.50. 

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No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.

Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.

“The housing correction is in a down phase,” Acciavatti said during a high-yield bond conference in New York. “We’re now going through a phase of deleveraging and the pulling out of easy money.”

Credit markets also will be under pressure from massive write-downs and losses stemming from consumer debt. The International Monetary Fund has estimated write-downs from global investment banks may approach $1 trillion, while J.P. Morgan forecasts the figure may climb as high as $600 billion.

A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years. 

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Russian President Dmitry Medvedev on Saturday criticized the United States for "economic egotism," saying it has fueled global troubles, and portrayed Russia’s growing economic might as a force for worldwide stabilization.

Recklessness by big banks and "the aggressive financial policies of the biggest economy in the world" have not just hurt corporations, Medvedev said. "Unfortunately, most people on the planet have become poorer," he said.

Medvedev’s comments to the St. Petersburg International Economic Forum, a gathering of thousands of businessmen, came exactly a month after his inauguration. It was one of the most high-profile domestic appearances of his presidency, which so far has been marked mostly by issuing decrees.

Although Medvedev has not shown much of his predecessor Vladimir Putin’s penchant for sharply criticizing the United States, his speech showed he shares Putin’s views of America as a power-hungry and sometimes irresponsible country intent on dominating world affairs.

He said some countries increasingly strive to help themselves while ignoring the interests of others.

"In fact, this is growing economic egotism," Medvedev said. He said that while this is natural in some respects, it sometimes amounts to "economic nationalism — when pragmatic interests are replaced with political considerations."

Many observers have criticized Russia for similar nationalism, seeing the country use its enormous gas and oil reserves as instruments of political power.

But Medvedev claimed Russia is only using its resources to become more integrated in the global economy.

"Russia is a global player today. Understanding our responsibility for the fate of the world, we wish to participate in forming new rules of the game, not because of the notorious ‘imperial ambitions’ but because we have the appropriate opportunities and resources here," he said.

Medvedev wants to develop Russia’s hydrocarbons business further through liberalizing the gas market and easing the tax burden on the country’s oil sector. He said such steps would help ensure stability on global energy markets.

He also repeated previously expressed desires to see Russia become an international financial center of the order of New York or London, and proposed holding an international financial conference this year.

U.S. Commerce Secretary Carlos Gutierrez sidestepped the criticism of the United States and suggested Medvedev’s reference to a global economic crisis was overstated, saying "we have said we are going through a downturn in growth."

"The president’s speech, I thought, contained some very powerful statements and some very welcome statements for the business community," Gutierrez told reporters. "He talked about the need for openness, he talked about the risk of economic nationalism, he talked about the risk of economic egoism, he talked about the importance of institutions, about the importance of transparency."

Recent pressure by tax authorities on the British-Russian joint venture oil company TNK-BP has raised questions about Russia’s sincerity in calls for respecting institutions. Many observers see the pressure as ultimately aimed at forcingBP PLC (BP) to turn over its stake to state-controlled oil company OAO Rosneft or to Russian businessmen.

"What the international community would like to see is that (the case) is dealt with in a way that is transparent, that institutions not be abused," Gutierrez said.

BP CEO Tony Hayward separately told a panel that he was confident TNK-BP "has a big future ahead of it and that we will resolve our well-publicized differences."

In turn, the CEO of state natural gas monopoly Gazprom rejected contentions that Russia is using energy as a political tool, and suggested Europe would be in trouble without Russian supplies.

"Some European officials are having trouble deciding what they fear more — severe energy shortages or a fictitious Russian threat," Alexei Miller said.

He also dismissed concerns that Gazprom’s key fields were losing capacity and that new developments will not be able to keep up the production level.

"Gazprom is able to meet any solvent consumer’s demand," he said. 

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