Bank of America buys Countrywide
In a move that surprised many observers, Bank of America (BoA) announced this week that it would buy nearly bankrupt mortgage lender Countrywide Financial. The deal, for $4 billion of BoA stock comes in the wake of the subprime mortgage debacle, an area where BoA had been somewhat less exposed, unlike competitors like Citigroup, Wells Fargo, and Wachovia.
Of course, Countryside, the #1 US mortgage lender, is up to its eyeballs involved. It services nearly one in every six US mortgages, and it had a preponderance of adjustable-rate mortgages as well as subprime mortgages on its books. As defaults mounted, the company's stock price sank by 79% over the last year.
Is this a big misstep for BoA? It's complex. BoA had already foolishly invested $2 billion in Countrywide last summer, gaining a 16% share as it tried to bail out the faltering lender. Certainly, BoA stood to lose nearly all its investment if it let Countrywide slide. The approach has been termed "doubling-down."
The take from a Wall Street Journal article ("Countrywide Gets Rescue Deal", 1/12/08) is: "For Bank of America, the deal would instantly allow it to realize its ambition of becoming a dominant mortgage lender. But it also would bring some ticking time bombs, whose powers to destroy value won't be clear at least until the housing market bottoms out, which may not be for a year or more."
Not least of the problems are ongoing lawsuits and state and federal investigations of Countrywide's alleged predatory ending practices. There are also investigations of improper stock trading by company insiders. Furthermore, the housing market may take years to recovery, limiting new mortgage business available.
One benefit the company could get is 9 million new customers (borrowers) to whom BoA can pitch credit cards, car loans, checking accounts, and so on. The thought is that the growth in market share will make up for the uncollectible mortgages in the portfolio. BoA has had two very successful recent acquisitions that have expanded its customer base: the $48 billion buyout of FleetBoston in 2004 and the $35 billion acquisition of credit card specialist MBNA in 2006, along with the purchase of LaSalle bank in 2007 for $21 billion.
US Treasury Department officials, afraid of the domino effect should Countrywide topple, apparently "encouraged" BoA to be the rescuer. Some suspect that there may be a deal whereby the Treasury Department overlooks its policy of not allowing any one bank to keep more than 10% of all US deposits - BoA is currently very close to that number.
Whatever happens to BoA from the move, one guy walks out of this disaster with a big smile. Countrywide CEO Angelo Mozilo standard to walk off with $83 million in severance pay. According to one compensation expert quoted in Bloomberg News article ("Countrywide's Mozilo May Reap $83 Million in Takeover", 1/11/08) the severance for Mozilo is like "paying the captain of the Titanic buckets of money for sinking the ship."
5:28:13 PM 
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