Translated material
M&A to the rescue
Countrywide trusted
The American mortgage market seems to be starting to feel its way. Yesterday, Bank of America announced that it had invested $2 billion in the largest US mortgage company, Countrywide Financial Corp., which suffered significant losses amid a liquidity crisis. In addition, Bank of America, along with the largest retail banks JPMorgan and Wachovia, announced they had raised $500 million each from the Federal Reserve. Thus, they urged other, smaller players not to hesitate to borrow funds from the regulator to combat the credit crisis. Against the backdrop of this news, American stock indices began to rise, and the yen, which investors used as a “safe haven,” fell yesterday.Yesterday, Bank of America, the second-largest bank in the United States, said it had bought a stake of Countrywide Financial Corp.'s non-voting preferred stock, which could be converted into common stock at $18, a 17.5% discount to its current price. . It is assumed that this investment, the total amount of which is $2 billion, should help the company cope with the lack of liquidity. It was previously reported that billionaire Warren Buffett was interested in investing in Countrywide. For the owner of the investment company Berkshire Hathaway, The Wall Street Journal noted, the debt servicing division, as well as a portfolio of mortgage loans and mortgage-backed securities, may be of interest. Previously, Mr. Buffett noted that the real estate crisis opens up good investment opportunities. Berkshire Hathaway has already invested in the sixth-largest US mortgage company, Bank of America Corp. In addition, Mr. Buffett is a longtime shareholder of WellFargo & Co., the second largest mortgage company in the United States.
A week ago, Countrywide announced it had secured an $11.5 billion line of credit from a group of 40 banks. The market regarded the deal as saving a drowning man, and Countrywide's shares fell by 15%.
Countrywide CEO Angelo Mozilo said yesterday that the company would have survived without Bank of America. However, according to him, with the help of “this sign of trust” the company’s position will be strengthened. Countrywide shares then jumped 19%. Mr Mozilo rejected suggestions that the deal could lead to a merger between the companies, but said they would consider providing services to each other. However, some experts believe that Bank of America will continue to increase its stake in the mortgage company. "I think they will eventually try to acquire the entire company," said a Morningstar Inc. analyst. Ganesh Ratnam. “Otherwise, I see no reason to invest $2 billion there.”
In addition, on Thursday JPMorgan, Bank of America and Wachovia announced in a joint statement that they had borrowed $500 million from the Fed. As is known, these banks are among the five largest in the United States, have good liquidity and the ability to attract funds from other sources on more favorable terms. However, they decided to set a good example for their colleagues: according to their statement, they "believe in the importance of taking a leadership position now in demonstrating the potential of the Fed's primary lending capabilities and encouraging other financial institutions to take advantage of them." Let us recall that the discount rate at which the Federal Reserve gives loans to commercial banks was reduced last Friday from 6.25 to 5.75% per annum.
"With this news, as well as the Federal Reserve's actions last week, it appears that the mortgage market is returning to more manageable levels of activity and liquidity faster than we expected," Bloomberg quoted one Wall Street analyst as saying.
Some signs of recovery can also be seen in the foreign exchange market, where investors are beginning to engage in carry trades, in which low-yielding currencies are sold and high-yielding currencies are bought. Rising stock markets prompted traders to sell the low-yielding yen, and it was lower against major currencies on Thursday.
As analysts predicted, the Bank of Japan, following the meeting that ended yesterday, left the key interest rate at 0.5% per annum. There were rumors on the market that at a meeting in September the Japanese Central Bank would keep the rate unchanged if the US Federal Reserve lowered the key rate before that. However, the head of the Bank of Japan, Toshihiko Fukui, said yesterday that the regulator's monetary policy will not be affected by decisions made by the central banks of other countries. According to him, the central bank should not revise the rate hike scenario unless volatility in financial markets seriously harms the economy.
Despite some improvements in the US financial sector, the pressure of the crisis continues. According to the Financial Times, Lehman Brothers announced its intention to close its mortgage division BNC Mortgage, which worked in the field of issuing loans to unreliable borrowers. The investment bank's share price has fallen by 24% since the beginning of 2007. In addition, Accredited Home Lenders and HSBC have decided to reduce their workforce. Accredited Home Lenders will lay off 1,600 people, more than 60% of its workforce, and 600 people will leave HSBC.
The head of the International Monetary Fund, Rodrigo de Rato, said yesterday that the IMF may lower its forecast for global economic growth due to the crisis in credit markets. The latest IMF forecast, published on July 25, predicted that the global economy would grow by 5.2% in 2007 and 2008. "There is a possibility that we will lower the forecast, but the revision will not be significant," Mr. Rato said. He said the credit crunch “will have some impact on economic growth, more so for some economies than others.”