BofA-Countrywide, the fear factor

Not everyone is persuaded by speculation that Bank of America (BAC) could renegotiate or walk away from its $4 billion agreement to buy Countrywide (CFC). At The New York Times DealBook blog, law professor Steven Davidoff writes that the steep decline of the mortgage markets Countrywide operates in - and the fact that those conditions were known back in January, when BofA agreed to make the purchase - will make it difficult for BofA to claim a so-called material adverse event that would let it walk.

“BofA is going to have a hard time claiming an MAE,” Davidoff writes, “given that Countrywide’s woes appear to be the result of general economic conditions generally affecting its industry.”

Davidoff concedes that the status of the BofA-Countrywide deal isn’t clear-cut, but he says that without knowing the content of documents such as disclosure schedules, investors can’t know whether Bank of America might have grounds to terminate the deal.

“Ultimately, the only thing this analyst’s report tells us is that BofA might have a financial incentive to walk or cut the price,” he writes, in reference to a report Monday that said BofA might face outsize losses on Countrywide’s loan book. “But to do so, it must have grounds under the merger agreement. And as I said, it appears that any MAE claim will be tough to prove, at least based on the public facts. Perhaps the legal investigations may qualify, or shareholder or customer lawsuits. But again, we just don’t know without seeing what is in the disclosure schedules.”

All that said, Davidoff notes that the collapse of buyout deals such as those for Sallie Mae (SLM) and Harman (HAR) is making investors in targets understandably suspicious. “Irrational fear in today’s buyout market,” he writes, “has unfortunately proven correct too many times.”