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Acquisition of Lender Is Possibly in Jeopardy

Is Kenneth D. Lewis getting cold feet?

Four months after Mr. Lewis, the chief executive of the Bank of America Corporation, agreed to buy the Countrywide Financial Corporation for $4.1 billion, Wall Street is buzzing that he may reduce his offer for the troubled mortgage giant or perhaps even walk away from the deal.

Countrywide’s share price sank 10.4 percent on Monday in a torrent of heavy selling. The rout, one of the biggest one-day declines since Mr. Lewis unveiled his blockbuster deal in January, was touched off by an analyst report urging Bank of America to abandon the acquisition because of growing problems at Countrywide, the nation’s largest home lender.

Robert Stickler, a Bank of America spokesman, said the deal was on track. But stock market investors have their doubts. Countrywide’s shares closed at $5.36, almost 24 percent below the $7 price that Mr. Lewis offered. Bank of America’s shares fell 2 percent, to $38.97, as record oil prices helped depress the broader stock market.

Kenneth Lewis
Kenneth Lewis

Many still hope the Bank of America deal will save Countrywide from an uncertain future.

But since Mr. Lewis announced the acquisition, the problems at Countrywide have intensified. Countrywide’s losses on mortgages and home equity loans have ballooned, federal and state agencies have investigated its business practices, and the company is bracing for a wave of lawsuits from angry customers and investors.

A panel of the Senate Judiciary Committee is scheduled to hold hearings on Tuesday to examine the way Countrywide’s loan servicing unit has treated troubled borrowers who try to hang on to their homes by seeking protection in Chapter 13 bankruptcy.

The troubles have grown so acute that two longtime analysts denounced Mr. Lewis’s deal on Monday. “Bank of America should completely walk away from the Countrywide deal, as Countrywide’s loan portfolio will prove to be a drag on earnings and force Bank of America to raise additional capital,” Paul J. Miller Jr., a mortgage industry analyst at Friedman, Billings, Ramsey & Company, wrote in a report. He downgraded Countrywide’s rating to underperform.

Charles Peabody, a financial services analyst at Portales Partners, said the deal put Bank of America “between a rock and a hard place” and put a sell rating on its stock. “Either the deal goes through and Bank of America faces significant charges, or the deal fails and Bank of America faces a significant write-down on its $2 billion preferred investment in Countrywide,” Mr. Peabody wrote.

Even before those warnings, Bank of America itself had prompted speculation it might pull back from the deal. On Thursday, Bank of America added a new paragraph to merger documents suggesting that it might not guarantee some or all of Countrywide’s publicly traded bonds. Bank of America previously created a bankruptcy-proof vehicle that could house Countrywide’s debt. On Friday, Standard & Poor’s responded by unexpectedly cutting Countrywide’s credit rating to junk-bond levels. On Monday, Fitch Ratings followed suit.

Many analysts said Bank of America’s statement about Countrywide’s debt could be a hardball tactic to cut a new deal at a lower price.

“They should walk away, but they will not,” Mr. Miller said, adding that it would be tough for “empire builders” like Mr. Lewis and his team to tolerate the damage to their reputation that would be caused by abandoning the deal. Instead, he thinks that Bank of America will try to renegotiate the deal for as little as $2 a share.

“Given the potential marks on the portfolio and legal costs going forward, it is getting to the point where it becomes uneconomical to close the deal,” Mr. Miller said. “We are seeing more foreclosures, more delinquencies, more charge-offs, and it is going to get worse.”

Indeed, Countrywide’s losses have risen sharply since Bank of America made its initial $2 billion investment last summer. Last fall, Mr. Peabody estimated that Countrywide’s losses might total $9 billion or $10 billion. Now, as housing values continue to plummet, they may reach $16 billion or more.

Bank of America, in the meantime, is under pressure to raise billions of dollars in fresh capital, just as many of its rivals like Citigroup and UBS have done. On top of its recent $4 billion preferred stock offering, Bank of America may have to slash its dividend and raise up to $8 billion of common stock, or some combination of both, Mr. Peabody said.

Mr. Stickler, the Bank of America spokesman, said on Monday that the company felt “pretty comfortable at the moment” with its capital position and said the Countrywide transaction was “on track to close, as agreed to, early in third quarter.”

Countrywide has other pressing matters on its hands. On Tuesday, Charles E. Schumer, Democrat of New York who is chairman of the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, is set to hold a hearing examining the lender’s practices.

Steve Bailey, Countrywide’s chief executive for loan administration, is among those scheduled to testify. In prepared remarks, Mr. Bailey denies that Countrywide’s servicing unit is abusing the bankruptcy system and says that an internal review of loans in bankruptcy shows that mistakes are few.

Nevertheless, the company is instituting new procedures to safeguard its customers, according to Mr. Bailey’s statement.

“Now that Congress is taking a close look at what Countrywide has been up to, the company finally seems to recognize the need to change its behavior,” Senator Schumer said in a statement. “But a pattern this unsettling will demand more than cosmetic fixes.”

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