Felix Salmon at Portfolio.com has rightly trounced me for buying Countrywide Financial earlier this summer. I thought it was a good bet at the time, but I got out in August once things started to get confusing. I knew CFC would have to recognize losses from their higher funding rates and portfolio markdowns. But it was the diluting Bank of America investment and ensuing rally that made me realize that it would be awhile before I would be able to figure out what the equity component of this bank is really worth. I remember the old trader saying: “First loss is your best loss.” Well I took losses in this one, and after many buys and sells over the month my final losses amounted to about six bucks a share and my last sales were around $19.00. I have since moved into various bets that make money if Countrywide survives. Which it will, with Bank of America (BAC) or someone else’s help. I am happy to bet the company won’t go bankrupt. I’m now into the preferred shares and shorting some deep out of the money puts.

The Countrywide Preferred B (CFCprB – $17.15) shares have a dividend yield of 9.9% (which, unlike the common dividend, the bank is likely to continue paying) and a par value of $25.00.

The main risk is that countrywide goes into bankruptcy and these deeply subordinated debt-like obligations get severely discounted or wiped out. If CountryWide is taken over by another institution they will become the obligation of that institution and have much better credit quality. Higher credit quality means higher prices, but upside is pretty much limited to par value ($25.00) as the acquirer would likely call any preferred shares that paid a higher rate than it had to pay on its own preference shares.

There is a silly pun on Wall Street about how ironically named the “preferred stock” trades on the fixed income (bond) trading floor are, and that convertible bonds trade on the equity (stock) trading floor of every big broker.

Disclosure: I do not own (CFC – $16.41) common stock. I own CFC preferred class B (CFCprB – $17.15) and am short 10 and 15 strike puts on CFC. I am likely to cover (buy back) the 15 strike puts. The CFC Preferred B are also known as COUNTRYWIDE CAP V. I own Bank of America (BAC – $49.36)

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