After Countrywide (CFC) reported its third quarter loss last week, the company said that it would make money in Q4 and next year. There is really no way for the firm’s management to know that, but the news took the stock up late in the week.
Countrywide is offering good rates on deposits, as the Wall Street Journal points out. The mortgage bank may be able to make some money on that spread. However, as one analyst pointed out :Countrywide has yet to show that it can "earn above its cost of capital" under this new model at a time when the outlook for losses from defaults is unclear,"
Countrywide has the Merrill Lynch (MER) problem. It does not know exactly what its balance sheet is worth. It doesn’t have buyers for its assets. As default rates on mortgages and home equity loans change, so does the value of the loans, and the potential for write-downs.
Merrill had to make a multi-billion adjustment in its losses. And, that was over a period of only a few weeks. Over the course of an entire quarter, Countrywide could face a huge write-down in its assets.
Countrywide could also report a preliminary profit in Q4 and send the results to its auditors. Image having the job of auditing Countrywide. Would the results be ultra-conservative? Investors can bet on it. And, that means a restatement which would not be favorable to the company is entirely possible.
Countrywide won’t make money in Q4
Douglas A. McIntyre
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