The FBI is looking into whether Countrywide (NYSE: CFC) committed securities fraud by making false statements about the mortgage bank’s financial position.
The Wall Street Journal writes that a "potential issue facing the company is whether it has been candid in its accounting for losses. People familiar with the matter said that Countrywide’s losses may be several times greater than it has disclosed."
Aside from the potential civil and criminal issues at stake, the investigation could scuttle the planned buy-out of Countrywide by Bank of America (NYSE: BAC) It is not clear whether the mortgage company can survive as an independent entity if the big money center bank walks away. Clearly if auditors and the government determine that CFC losses are much greater than represented, it might drive the firm into insolvency.
The Bank of America deal is probably the only avenue for Countrywide shareholders to get any money for their shares. The company’s stock has dropped from a 52-week high of $42.24 to just above $5 which is not much above its 52-week low.
The disclosure of the FBI probe is likely to push shares lower. If new, significant losses have to be reported, the price may well go to zero.
Douglas A. McIntyre
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