An aggressive dealmaker who has already snapped up behemoths
FleetBoston Financial and MBNA, Bank of America chief executive Ken
Lewis this time isn't buying a financial winner. Delinquencies and
loans in pending foreclosure are rising in Countrywide's loan
portfolio, and Lewis said Friday "there are near-term challenges"
in the nation's housing market.
But Countrywide's troubles have allowed Lewis to sweep in and
add a major business line to his supermarket of financial products
on the cheap.
"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 in a statement.
It also places Lewis in the position of a market savior. By
buying Countrywide, he's keeping the industry and regulators from
the messy task of figuring out who would take on the responsibility
of collecting payments for the 9 million U.S. home loans serviced
by the Calabasas, Calif.-based lender. Lewis said Friday there was
no government support for Countrywide's loan portfolio.
"There's still plenty of risk involved," said Bart Narter,
senior analyst at Celent, a Boston-based financial research and
consulting firm. "He's brave to do it. But I think that it's very
likely down the road to be profitable, maybe not immediately, but
There was no immediate work on job cuts, but analysts said they
expect some among the ranks of Countrywide's 15,000 employees.
Lewis said he would like Countrywide chairman and chief executive
Angelo R. Mozilo to stay with the combined companies until the deal
"Angelo has told me that he will do anything that we want him
to do," Lewis said. "I would guess that he'll want to go have
some fun. I will talk with him next week about his personal
desires. Many of the senior people will have big operating roles in
Shareholders of Countrywide will receive 0.1822 of a share of
Bank of America stock in exchange for each share of Countrywide.
The deal is expected to close in the third quarter and to be
neutral to Bank of America earnings per share in 2008 and lift
earnings per share in 2009, excluding buyout and restructuring
Bank of America expects $670 million in after-tax cost savings
in the transaction, or 11 percent of the expense base of the two
companies' mortgage operations.
The agreement has been approved by both companies' boards and is
subject to regulatory and Countrywide's shareholders approval.
Shares in Countrywide hit record lows in recent days on
persistent rumors that a bankruptcy was imminent, a condition
brought on by the widespread spike in mortgage defaults and
foreclosures, especially in subprime loans - those made to
borrowers with weak credit.
Countrywide shares plummeted more than 13 percent, or $1.04, to
$6.71 at the open of trading Friday. Bank of America shares fell 19
cents to $39.11.
Countrywide shares have fallen 57 percent since Bank of America
made its $2 billion deal in August at $18 per share. That purchase
of preferred stock was convertible into a common shares of
Countrywide at $18 per share, for roughly a 16 percent stake in the
Along with the $2 billion investment from Bank of America,
Countrywide was forced to draw on an $11.5 billion line of credit
to steady itself in August. It also tightened its credit guidelines
and stopped selling some types of adjustable rate loans. But
analysts said it wasn't enough, with one noting this week that
Countrywide needed an infusion of $4 billion in capital within the
next two weeks to save itself.
Lewis' bank holds $1.5 trillion in assets and is the nation's
largest bank by market capitalization
"Their balance sheet can take a shock much better than
Countrywide," said CreditSights senior analyst David Hendler.
"When you take the shocks at Countrywide, they have a big, busting
consequence that's negative."
While Lewis downplayed the prospect of a major deal last month,
it fits with an established pattern of building Bank of America
through acquisition. In the past few years, Lewis has expanded the
bank's retail operation with multibillion purchases of FleetBoston
Financial Corp., bolted on a credit card business by adding MBNA
Corp., and grabbed a wealth-management business in U.S. Trust Co.
The result of all the dealmaking is a widely diversified
financial services company that does business with nearly one out
of every two American households.
In the past year, Bank of America has boosted its market share
of prime mortgages, or those offered to borrowers with a solid
credit history, and was the top retail mortgage originator in the
U.S. during the first nine months of 2007.
"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."
In Countrywide, Lewis gets the "best, total mortgage-banking
company in the U.S. by far," Hendler said. Countrywide's
sophisticated back office is a valuable asset that makes Bank of
America a much bigger competitor with Wells Fargo & Co., Washington
Mutual Inc. and others, he said. In 2007, Countrywide had $408
billion in mortgage originations and has a servicing portfolio of
about $1.5 trillion with 9 million loans.
"The technology platform, the people who run it, the hedging,
the facilities, the mortgage servicing rights, the origination
platform, you know, they are all state of the art," Hendler said.
While there are some regulator hurdles to close the deal, they
are hardly insurmountable. The buyout would require approval from
the Federal Reserve, and possibly other agencies, but analysts
believe regulators are more concerned about a Countrywide collapse
than industry consolidation.
A Countrywide failure would be a huge blow to
government-sponsored mortgage finance companies Fannie Mae and
Freddie Mac, which are major buyers of Countrywide's loans.
Federal law also bars banks from acquisitions that would
increase market share above 10 percent of U.S. deposits, a limit
that Bank of America is nearing. Bank of America chief financial
officer Joe Price said because Countrywide Bank us a federally
regulated thrift, it "doesn't play into the deposit cap."
In addition, banking industry experts say Bank of America could
easily lower the total amount of money held in deposits by
decreasing interest rates and shedding deposits.
AP Business Writers Alex Veiga in Los Angeles and Alan Zibel in
Washington contributed to this report.