You may recall that on July 26, I posted Harbinger of Doom, wherein a skunk visited the Varones estate to warn of trouble to come. Countrywide subsequently plummeted from $27 to $19 before rebounding to today's close just under $22.

Tonight, we have news of a savior for Countrywide: a $2 billion preferred equity investment from Bank of America. A match made in heaven? Fortune suggests not: the Varones estate tonight witnessed skunks having sex.

I hate to be the one to spoil a love story, but let's look at this from Bank of America's perspective. For the sake of argument, let's assume that someone at B of A knows something about finance.

You have a perpetual $2 billion 7.25% money machine and a call option at $18. You're sitting pretty, as long as CFC doesn't go below $18 heading toward bankruptcy. What on earth do you do?

If CFC opens where it's trading in the after-hours, around $26, you short 111 million shares, locking in a gain of $8 times 111 million shares = $888 million. Meanwhile, you're still earning your outrageous 7.25% on the preferred while paying less than 3% on the short common (and that's assuming the dividend doesn't get cut -- a big if!!!). Even if the stock trades down and B of A can only short in the low 20's, it's still hundreds of millions in free money!!!

The skunks have spoken.

UPDATE 8/23/07 10:42 am: CFC has now traded 113 million shares above $22. If B of A is not taking advantage of this volume to short, they are STEW PUD. If the shares are not available to borrow, they can accomplish the same thing by swap agreement or options.

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