Rate Cut & Benefits of Credit Unions & Bank That Will Be Around

Okay, so I was early on the global rate cut, by a day. Notice that it did not help? The Fed is firing bullets into the darkness now. This won't be the last domestic cut...I can see them easing again at the end of this month.

Almost every call I take at some point winds around to..."So are you guys going to be around?"

I work for a credit union. Realize that the business model of a credit union is different than that of a bank. Most banks, have to make a profit for their stockholders. They make big bets to make more money (traditionally) so that they can maintain a reasonable level of profitability. Asset classes are falling and if a bank have to raise capital in a market where capital is not available(see yesterdays post)...well we've seen how that ends (think IndyMac, WaMu, and Wachovia). Credit Unions are there for the shareholders, those who actually have their money on deposit with the credit union. It is much more simple business. Credit Unions do not take the same risks for banks. The very nature of the credit union and who it serves, makes the relatively safer bet than some banks.

So, do I think my credit union will make it through this. Absolutely. The only thing that I can see tripping up where I work is large job losses in our area. I don't think it is too big of an issue as my credit union services teachers and medical professionals for the most part. It is a pretty safe bet those jobs aren't going anywhere. But you never know.

As for banks, if you're not at Bank of America (BAC) by the way...no one can be surprised by their price dive. They BOUGHT COUNTRYWIDE and MERRILL LYNCH, Wells Fargo (WFC) which is the only one of these names that I would consider adding (which I'm not)and THEY BOUGHT WACHOVIA (but I bet you they end up with the GOOD part of Wachovia). Or JPMORGAN Chase (JPM), which has purchased BEAR STERNS and WAMU. And maybe Citi...but they have their own problems. I think they fought so hard to get their piece of Wachovia to be in the "too big to fail" category.

Outside that fantastic four, I can't see who will still be around. You are going to have smaller players that will remain because they were much smaller players and didn't go whole hog on the mortgage orgy at the turn of the century.

What Does Warren Want With Countrywide?

The answer is simple. It’s not the origination side of the business.

Consider Countrywide’s mortgage servicing portfolio by itself. Countrywide services $1.4 trillion in mortgage loans. Most servicers “value” their servicing portfolio anywhere between 100 and 200 basis points. In real terms, Countrywide’s servicing “value” is somewhere between $14-28 billion. That is some chunk of change for just collecting mortgage payments and handling escrow accounts. Yes, there is more to it than that, but that is the gist of mortgage servicing.

Now Berkshire Hathaway will not be interested in purchasing the entire servicing portfolio of Countrywide. A good portion of Countrywide’s servicing portfolio is sub-prime mortgages and ALT-A mortgages. Berkshire would be interested in the portfolio of the performing mortgages as not to get dragged down by any of the current mess that has so often commented on. There are other aspects of Countrywide that interests Buffet, such as the companies mortgage backed securities.

But if Buffet can get a portion of Countrywide at a discount now, it’s a win-win situation for the two companies. Berkshire gets to add Countrywide to it’s stable of companies and a company that has delivered good earnings over a large period of time. Countrywide would get some much needed relief.

I do not like Angelo Mozilo but he has built the largest lender, prime and sub-prime, in the country and does not want to see it go up in smoke. I’m sure he would be acceptable to the idea of being brought into the Berkshire stable of companies.

Buffet does not comment on companies that it is buying and selling but Berkshire did recently disclose holdings in both Bank of American and Wells Fargo, the sixth and second largest mortgage lenders. And Buffet told TV network CNBC last week that the worsening credit and housing markets may present some “real” investment opportunities.

Berkshire is not interested in the origination portion of Countrywide. This is the same portion of Countrywide that announced 500 job layoffs and it is my belief will have to trim more jobs before the pain is truly through.

You saw a big jump in stock price today based on the information above. Countrywide has lost about 50% of it’s stock value within the last year. Maybe now is the time to look at Countrywide, even though I don’t like it.