Interesting times we live in.

It appears that the BAC/CFC deal is a fixed conversion ratio transaction. All stock, no cash.

Now this is amusing, because BAC also says they think they need more Tier 1 capital. That could get kinda ugly......

The devil is in the details, of course, and there's all sorts of unknowns. The deal isn't going to close until the 3rd quarter, which is a very long time, and from a standpoint of risk the chance of this thing blowing up long before then is extremely high.

The big fat Lucifer in the transaction is almost certain to be the "MAC" clause, or "Material Adverse Change", and that of course is not known. What's covered? Serious additional business deterioration? Macro economic? Legal issues (e.g. lawsuits against CFC)? Hmmmmm...

There are about 500 different ways that this can blow up, and in more than six months time, well.....

As for the CFC common shareholders, you got ocularly penetrated unless you bought at $5 - and maybe even then. I sure don't like this deal if I'm a common shareholder, but what option do you have? Sue to block it? Ok, you get zero - the company goes BK. Whine and moan? Yeah, that'll do a lot.

The 900lb Gorilla in the room if you're long CFC is whether people shift their shorts over to BAC and pound it into the dirt. The premarket activity in BAC's stock suggests that the answer may be "no", but I wouldn't take that bet yet. BAC has a huge portfolio full of risk in a slowing economy already, and this deal sure looks to me like throwing steaks in the tiger cage and then running in, hoping that he eats the older food first!

So why would BAC do this?

Simple - their $2b buyin before was dead money and they were concerned they might lose in the BK auction for the servicing platform, which they do want. So how do you fix that? Throw another $4b on the table, make the company a wholly-owned sub, AND PRAY.

Hmmmm.... good investment strategy? Not if it was my money! But if it works out it will be extremely lucrative for BAC, so there is some intelligence behind the move.

Note that on the conference call with BAC this morning they were very evasive about whether they would be taking CFC's debt onto their own books. Gee, you think?

Uh guys, the answer to a question that someone won't answer is a big fat NO!

So this looks to me to be nothing more or less than an attempt to prevent a massive cluster with mortgage servicing, and I'm sure that's where The Government came in with the poke-poke-prod-prod. That's ok - I don't mind that sort of intervention; nobody needs that sort of crap in the marketplace, so protecting the people who have to pay their loans looks decent to me.

Beyond that?

There's nothing "there there".

So heh, I bought some PUTs on the premise that the deal was crap and of course they're zeros. That's ok - it was a speculative bet that didn't pay.

There's nothing in here to like. And there is nothing that's going to stop the slide in home prices, until the affordability problem goes away - which is years off.

The market in general sold off HARD, with the financials holding up reasonably well, all things considered.

I expect we will get a violent bounce north early next week, and at that point, it will be time to really load up.

Here's the technical!