BofA Makes Risky Bet With Countrywide Purchase

Bank of America agreed to acquire battered mortgage lender Countrywide Financial in a $4 billion transaction that could help avert one of the biggest collapses from the U.S. housing crisis.

The purchase marks another major but risky acquisition for Bank of America Chief Executive Kenneth Lewis, who has spent more than $100 billion since 2004 to create the nation's
second-largest bank, and by far its largest consumer bank.

Bank of America branch, New York City.
Oliver Quillia for
Bank of America branch, New York City.

It would provide a lifeline for Countrywide. The largest U.S. mortgage lender has been convulsed by mounting losses and defaults, a loss of access to credit markets, and a slew of
lawsuits and regulatory probes into its lending practices and Chief Executive Angelo Mozilo's pay. On Tuesday, it rejected rumors it might go bankrupt.

Before Friday, Bank of America had a roughly $1.3 billion paper loss on the $2 billion it injected into Countrywide in Augustas the global credit crisis deepened. Countrywide's market value has slid about $22 billion in the last year.

"I'm breathing a big sigh of relief," said Nancy Bush, managing member of NAB Research LLC in Aiken, South Carolina. "This takes out a major point of uncertainty in the industry."

The transaction values Countrywide at $7.16 per share, a 7.6 percent discount to its Thursday closing price. Countrywide shareholders would receive 0.1822 of a Bank of America share in
exchange for each of their shares.

Shares of Countrywide fell over 16% after rising more than 51% percent on Thursday in anticipation of the transaction. Bank of America also declined.

Shares of Washington Mutual, the largest U.S. savings and loan and also a troubled mortgage lender, rose Friday after CNBC said it had held "very preliminary" merger talkswith JPMorgan Chase .

The combined company from the Bank of America-Countrywide deal would make close to one-fourth of U.S. mortgage loans, making its home loan business roughly twice as large as that of
Wells Fargo, which ranks second.

Charlotte, North Carolina-based Bank of America now ranks fifth in mortgage lending, according to the newsletter Inside Mortgage Finance.

On a conference call, Lewis acknowledged "near-term challenges" in mortgages, with expectations that volumes will fall amid "continued weakness in housing throughout 2008."

Still, he said Bank of America conducted "extensive due diligence" on Calabasas, California-based Countrywide, calling the purchase a "one-time opportunity" to buy "when the value
is very attractive."

Bank of America Chief Financial Officer Joe Price said the bank can add Countrywide's $61 billion of deposits without breaching a 10 percent federal deposit cap because of the thrift status of Countrywide's banking unit.

The bank's $21 billion purchase of LaSalle Bank Corp from Holland's ABN AMRO Holding NV in October gave it control of about 9.88 percent of U.S. deposits.

Not everyone considers the timing ideal.

"We don't feel like we're anywhere near out of the woods in this whole mortgage market, housing market, subprime morass," said Michael Mullaney, who helps invest about $10 billion at
Fiduciary Trust Co in Boston.

Bank of America expects a $1.2 billion restructuring charge from the transaction, and said it will need a couple of billion dollars of new capital to help preserve its capital ratios.

It expects by 2011 to realize $670 million of after-tax cost savings, or 11 percent of the combined companies' mortgage expenses. The bank expects a third-quarter closing, and said
the purchase should add 3 percent to earnings per share in 2009, excluding items.

It wasn't immediately clear how many jobs might be lost. Countrywide ended December with 50,600 employees, after eliminating about 11,000 in the previous five months.

Angelo Mozilo
Angelo Mozilo

Mozilo, a butcher's son from Bronx, New York who co-founded Countrywide in 1969, has been a lightning rod for critics who say he encouraged loose lending practices that contributed
heavily to the housing crisis.

Lewis said he wants to retain "a number" of senior Countrywide officials who are "very, very good operators."

He also said he would like the 69-year-old Mozilo to stay with Countrywide until the merger closes, after which "I would guess he would want to go have some fun."

Countrywide did not immediately return requests for comment.

In 2007, Countrywide made $408 billion of mortgages, or roughly one in six home loans. It also handles billings on some $1.48 trillion of mortgages in its servicing portfolio.

The company cut lending nearly in half late last year, and stopped making most of the variable-rate and subprime mortgages that caused many of its problems, after tight credit markets
forced it in August to draw down a $11.5 billion credit line.

Nevertheless, Countrywide on Wednesday said defaults and late payments in its servicing portfolio reached the highest on record. It lost $1.2 billion in the third quarter.

Asked about the prospect of further credit losses, Lewis said: "That would be embedded in the purchase price, and in our assumptions on earnings going forward."

Bank of America has not offered subprime mortgages since 2001, and said the combined company won't make them either.

Moody's Investors Service nevertheless said it may downgrade Bank of America's ratings, citing the need for the bank to raise capital, and risks from integrating Countrywide and potential write-downs and lawsuits.

Mozilo has also been faulted for collecting hundreds of millions of dollars in compensation this decade, including millions after it was clear the housing crisis had begun. He could receive another $36.4 million if the merger goes through, according to regulatory filings and compensation experts.

Bank of America's bankers and the law firms Cleary, Gottlieb, Steen & Hamilton LLP and K&L Gates advised the bank on the merger. Sandler O'Neill & Partners LP, Goldman Sachs &
Co and the law firm Wachtell Lipton Rosen & Katz advised Countrywide. Sandler advised Countrywide's board of directors.