Yesterday, news hit the market, beginning with a report in The Wall Street Journal, that Bank of America (BAC) was thinking of buying troubled mortgage bank Countrywide Financial (CFC). At one point CFC was up nearly 70% and closed up 51%.

In side the Davey Jones’ Locker known as the Countrywide balance sheet there are hundreds of mortgage backed securities and tens of thousand of mortages at one stage or another of being paid by borrowers, or not. No human knows exactly what they are worth, or, to be more blunt, are not worth. It may take billions of dollars to save the institution. That is money which will have to be raised somewhere.

Bank of America could be getting a deal. Through its own lending operations it may be able to deduce what the guts of Countrywide look like. Probably not. Those who look on the bright side think that BAC could get a huge lending operation with millions of customers and might be able to pay a song for the place.

Herb Greenberg thinks that the Federal government has a hand in the deal, not wanting to see a big lender fail. Perhaps the Fed is making some guarantee about helping to cover losses. Herb is often right, so there is good reason to believe that this theory holds some water.

Investors poured into the CFC stock yesterday adding $1.5 billion to the company’s market cap. In reality, they have no idea what the firm is worth. That number could well be zero.

What is certain is that the heavy volume in the stock proves that there are as many suckers in a market on the way down as there are when a stock is rising. They are people who know nothing about the intrinsic value of a thing and are likely to pay a price for that.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.