Countrywide's Investments Need More Scrutiny

I was looking over the recent 10K. Something struck me as odd. Countrywide currently has about $600 billion in Alt-A loans, though that number might be higher when you consider the months of January through March 2007. I feel that $600 billion is a low ball number because of the way Angelo Mozilo defended ALT-A Option ARMS as being "necessary" in this real estate market when interviewed by CNBC.

Back to the books. I know that Countrywide has significant usage of "Off Balance accounting". I do not know how much of their expenses and losses are hidden there but I wonder if we will ever know. I do know that $2.8 billion dollars share repurchase debt is hidden there. Enron did similar things with "off balance partnerships" which led to their downfall. The point is we really don't know, and this company hasn't been too easy to figure out in terms of how they "cook" their books.

Additionally, the $144 billion in "long term investments" need further clarification, especially in light of the fact that Countrywide among other major banks were named as "investors" in New Century's subprime loans, most likely in the form of CDO's. So the real question is, how much of the $144 billion in "long term investments" are worth nothing to less than face value at which it was purchased? Again, this is accounting trickery. By hiding the CDO's and other debts purchased from subprime, Counrywide can say that their subprime loan portfolio is less than 7% (though today, that number went up to 10%...hmmm). But if I can be a fly on the wall at Countrywide's accounting meetings, I would bet that a significant portion of the $144 billion isn't actually investments but liabilities. It is widely thought that Countrywide has about $50 billion in cash, but if the "investments" aren't exactly what it is, then the "debt" of roughly $113.68 billion might be much higher. Also, given that if the credit tightening happens (and it will) it will be more difficult to sell the CDO's. This will have the net effect of reducing the book value which currently stands at approximately $24.44. In fact, it may be possible that the company may be burdened with writeoffs that may exceed twice the market cap. That is scary.

Just a thought, but I am willing to bet that is why Ms. Brown abruptly quit and has never sold any of her shares in Countrywide. More fall outs are possible but the story gets more interesting!