Bank of America's $40 Billion Mistake |
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By DAN FITZPATRICK Bank
of America Corp. BAC +5.75% thought it had a bargain four years ago
when it paid $2.5 billion for tottering mortgage lender Countrywide
Financial Corp. But the ill-fated decision has already cost the
Charlotte, N.C., lender more than $40 billion in real-estate losses,
legal expenses and settlements with state and federal agencies,
according to people close to the bank. "It is the worst deal in the
history of American finance," said Tony Plath, a banking and
finance professor at the University of North Carolina at Charlotte.
"Hands down." The acquisition of Countrywide, which
was completed almost exactly four years ago, turned Bank of America into
a huge mortgage lender just as the U.S. housing market collapsed. Trouble by the Numbers ·
Deal Journal breaks down the deal
Of all the purchases Bank of America
made during its two-decade-long climb to the top of the U.S. banking
heap, the takeover of Countrywide has spawned more regret inside the
company than probably any other acquisition by former Chief Executive
Officer Kenneth Lewis or his predecessor, Hugh McColl. Current Chief Executive Officer Brian
Moynihan, who took over in 2010, has acknowledged that his bank
purchased Countrywide "just when you shouldn't have done it."
At the time of the takeover, Mr. Moynihan was running Bank of America's
investment-banking unit. Countrywide, founded 43 years ago,
became the nation's largest originator of home mortgages under the
leadership of co-founder Angelo Mozilo, the son of a Bronx butcher. Mr.
Mozilo emerged as one of the most vocal advocates for homeownership
during the company's rise but turned the company into a pioneer of
subprime and adjustable-rate mortgages that were some of the worst made
during the housing boom. Once some of those mortgages started to go bad,
he sold a $2 billion stake to Bank of America in 2007 and agreed to sell
the rest in January 2008. The deal closed on July 1, 2008. Bank officials say they finally have
their arms around the many problems spawned by Countrywide and that it
won't get much worse. Indeed, hopes that the worst is behind it on
Countrywide and other fronts has propelled Bank of America's shares to a
gain of more than 40% this year, making it the best-performing stock in
the Dow Jones Industrial Average. The total costs from Countrywide to
date, according to people close to the bank, include $34.5 billion
chewed up by a combination of consumer real-estate losses since mid-2008
and funds set aside to pay back investors who allege Countrywide wasn't
honest about the quality of mortgage-backed securities it issued before
the crisis. Additional legal costs from various settlements with federal
and state agencies and the initial Countrywide purchase amount push
total costs over $40 billion, these people said. But the tally could go higher. Bank of
America has said it could face an additional $5 billion in possible
losses, and scores of lawsuits seeking to pin Countrywide's liabilities
on Bank of America are pending in courtrooms around the U.S. Both Mr.
Lewis and Mr. Moynihan, for example, were asked about Countrywide while
sitting for depositions in April and May hosted by lawyers representing
bond insurer MBIA Inc., said a person familiar with that case. MBIA has
said in a lawsuit that it was misled when it insured Countrywide's
mortgage-backed securities before the housing bust. The 2008 Countrywide bid was a bet the
U.S. housing market was bearing a bottom and a play by Mr. Lewis to
become the nation's No. 1 mortgage lender. Regulators were in favor of
the deal, believing a Countrywide failure could pose a major risk to the
economy. Some at the bank sought assurances that
U.S. regulators would protect the company in exchange for going through
with the transaction. One deputy to Mr. Lewis asked the
Federal Reserve in early 2008 if the U.S. government might be willing to
provide some sort of protection if Countrywide's assets went bad, said
four people involved in the negotiations. The request wasn't authorized
by Mr. Lewis, said another person close to the bank. The Fed, worried
about rewarding other companies for excessive risk taking after coming
to the aid of tottering investment bank Bear Stearns in March 2008, said
no. "They said they wouldn't entertain
anything," one of these people said. Other bank officials sought assurances
from the Federal Reserve that it would go easier on Bank of America on
the issue of capital, an acknowledgment that the lender wouldn't be
punished for taking on more risk. That also didn't materialize, these
people said. The Fed eventually pressured the bank to raise more capital
in the fall of 2008 and forced it to slash its quarterly dividend to a
penny in early 2009 as the bank accepted a second slug of U.S. aid to
help complete a separate purchase of Merrill Lynch. Countrywide saddled Bank of America
with hundreds of thousands of delinquent borrowers, thrust it into the
middle of a foreclosure-paperwork scandal and exposed the bank to
countless lawsuits from mortgage-bond investors and insurers. The number
of people handling poor-performing real-estate loans for Bank of America
ballooned from 5,000 at the time of the Countrywide purchase to 50,000.
Those people occupy at least 4.5 million square feet of office space
around the country, the equivalent of 78 football fields. The crush of lawsuits and losses forced
Mr. Moynihan to shift the bank away from its long-standing emphasis on
growth. He sold off more than $50 billion in assets, shut down
unprofitable branches and announced plans to cut more than 30,000
employees. He told regulators it could sell off parts of its U.S.
franchise or its U.S. trust business if economic conditions were to
worsen significantly. The moves collectively have pushed Bank of America
below J.P. Morgan Chase as the nation's largest bank by assets. Mr. Moynihan and his team have
concluded there is no easy way out of the Countrywide mess. The CEO
toyed with the idea of placing Countrywide into bankruptcy but feared
that a Countrywide default might damage other subsidiaries. The board
concurred with Mr. Moynihan's recommendation last summer, and the bank
hasn't moved from that initial assessment, said a person close to the
bank. Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com |
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