Bank of America to Bail Out Countrywide

On Friday, Charlotte-based Bank of America announced that it has agreed to acquire Countrywide Financial for approximately $4 billion in stock. The agreement has been approved by both boards of directors and is subject to approval by Countrywide shareholders and the Federal Reserve. The buyout would effectively end Countrywide’s 38-year history as an independent company.

Countrywide shareholders would receive 0.1822 of Bank America stock for each Countrywide share, according to the agreement.

Other than a published statement, Bank of America is being closed-mouthed about the acquisition.

“It is too early in the process to discuss any local or state impacts relative to today's announcement. Our press release contains all of the information we are prepared to discuss at this time,” said Britney Sheehan, a spokesperson for Bank of America, Georgia.

However, industry analysts do not expect the merger to have any effect on Countrywide’s current customers.

Countrywide’s Woes
The problems of Countrywide Financial, and the mortgage banking industry in general, have been a media staple over the past few months. On Wednesday, Countrywide disclosed that 7.2 percent of the loans in its servicing portfolio were delinquent last month, up from 4.6 percent in December 2006. During the same time period, foreclosures also more than doubled, to 1.44 percent of unpaid principal balances versus 0.70 percent in December 2006.

Countrywide Credit Industries was formed in 1969 in New York City by Angelo R. Mozilo and David Loeb, and by the early 1990’s was the nation’s largest lender. By 2007 it had 900 offices and $200 billion in assets.

It is also the nation’s largest mortgage loan servicer with $1.4 trillion in loans and 51,000 employees.

Though it enjoyed gigantic growth through most of its history, Countrywide chose to continue to engage in risky business practices in its subprime lending division, even in the face of mounting evidence that the industry was ripe for collapse.

With financial pressures increasing, Countrywide laid off 11,000 employees, and in August, it was forced to draw down all of its $11.5 billion credit line. Wall Street investors were no longer interested in acquiring Countrywide’s subprime loans.

Countrywide stock fell 80 percent in 2007, depleting its $20 billion in market value. Shares fell even further last week, due to fears of a Countrywide bankruptcy. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), entities that buy huge blocks of loans from Countrywide, would suffer enormous setbacks if Countrywide filed for bankruptcy protection.

Though Countrywide has repeatedly reported that it is sufficiently liquid to continue its operations, investors have been skeptical.

Mozilo Comments on Merger
As Countrywide’s CEO since 1999, Mozilo has been called a “rogue” leader. Critics fault him for continuing to personally rake in huge dollars in his compensation package from salary, bonuses, awards, and stock options.

Millions were paid to Mozilo even after the subprime mortgage crisis began. As late as last March, when asked about burgeoning subprime problems, Mozilo boasted that Countrywide would benefit from the crisis because all his irrational competitors would be gone.

Bank of America’s acquisition of Countrywide could be the answer to a prayer for Mozilo, even though the stock purchase price of approximately $7 a share must be a huge disappointment.

“We believe this is the right decision for our shareholders, customers and employees,” Mozilo said about the merger. “Bank of America is one of the largest financial institutions in the U.S. and internationally, and we are confident that the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world.”
"Countrywide customers will gain access to a broad set of consumer products including credit cards and deposit services. Home ownership is a fundamental pillar of the U.S. economy and over time it will be a key area of growth for Bank of America," he added.
Some industry insiders believe that Mozilo was in favor of accepting the deal with Bank of America because he had doubts about Countrywide’s ability to survive.
Mozilo’s severance package could be as high as $72 million, in addition to $410 million in salary and option gains since he acquired the CEO position. He is expected to stay on as CEO through the third quarter of 2008, when the Bank of America deal is expected to be finalized.

Bank of America’s Role
The picture for Bank of America in the transaction isn’t all rosy. Bank of America already had a stake in Countrywide’s success or failure, stemming from a $2 billion investment in preferred stock with Countrywide back in August, giving Bank of America a 16 percent stake in the company by paying $18 a share.

But the Countrywide problems continued. Shares have fallen 57 percent since the August deal was made, leaving Bank of America with big losses.

Only weeks before, Kenneth D. Lewis, Bank of America’s chairman and chief executive officer, said he wasn’t interested in investing in the subprime mortgage market, and to do so would make him “eat about seven years of my words.”

Bank of America could be taking on significant legal liability in connection with Countrywide’s lending practices, and would be responsible for solving the problems that Countrywide has created.

"We are aware of the issues within the housing and mortgage industries," Lewis said. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”

The Upside of the Buyout
Lewis has definitely been aggressive in his attempts to transform Bank of America from a small regional bank to a nationwide financial player. The bank acquired FleetBoston Financial in 2003 for $48 billion, giving it more branches, customers, and checking accounts than any other U.S. Bank. In 2005, its acquisition of MBNA for $35 billion made Bank of America the largest credit card issuer in the country.

Bank of America also recently acquired LaSalle Bank Corp and the U.S. Trust wealth management firm.

With its purchase of Countrywide, Bank of America will become the leader in every major consumer finance category, the nation’s second-largest bank, and will be doing business with nearly one out of two American families.

There’s one potential problem facing Bank of America that most banks would love to have.

Federal law prohibits banks from acquisitions that would result in increasing their share above 10 percent of the nation’s deposits, and Bank of America is now close to that limit. Financial experts disagree about whether deposits in Countrywide's federally regulated thrift would count toward the limit, but it is expected that Bank of America could receive a waiver from regulators.

Lewis is putting a positive spin on the buyout.

“Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Lewis said.