skyscrapers - The W1nners' Club

 

Bank of America’s mortgage business lost over $50 billion since the purchase of Countrywide Financial for $2.5 billion back in 2008.

 

The then Bank of America CEO Ken Lewis said it was a rare chance to become No. 1 in the home loans marketplace. Instead the bank’s shareholders have spent the majority of the period since paying the price for Countrywide’s suspect lending practices.

The calamitous purchase harmed investors, employees, homeowners and the Bank of America headquarter’s city, Charlotte in North Carolina, which had risen to national prominence as its banks extended their reach across the USA in the 1980s and ‘90s.

Former Bank of America executives say that some insiders had concerns about the purchase at the time, but the bank forged ahead and it is rumoured government officials were pleased to check a problem off their list as the late noughties financial crisis loomed.

Since July 1, 2008, when the deal officially closed, the bank’s mortgage business has lost more than $50 billion. This number is more than double North Carolina’s annual state budget and includes settlements, payments to investors for soured loans, accounting write downs, and operating losses and profits.

It’s not easy to speculate exactly how much of the losses in the bank’s mortgage unit came from Countrywide, but the California-based lender was by far the much larger mortgage company and had a 17 percent market share compared with Bank of America’s 8 percent.

“Clearly, it’s the worst acquisition in history,” said Guy Cecala, publisher of Inside Mortgage Finance. “No one really appreciated the liability that was going to be associated with large lenders from the past. Bank of America paid for it.”

The acquisition began life as a $2 billion investment by Bank of America in Countrywide back in August 2007 at a time when the credit crunch had inspired rumours that the lender could face bankruptcy. The bank had a historic relationship with Countrywide CEO Angelo Mozilo, having helped him to start his mortgage company with a $75,000 loan back in 1969, but as the financial markets began to implode, Bank of America and Countrywide began discussing an acquisition in mid-November 2007. On January 11th 2008, the bank announced it was buying Countrywide for about $4 billion in stock, a price that would slip to $2.5 billion within six months.

“We view this as a onetime opportunity to acquire the best mortgage platform in the business at a time when the value is very attractive,” Lewis told analysts on the morning the deal was closed, but some former executives now say there were numerous doubts internally about the acquisition.

Only a small group of people from Bank of America’s smaller mortgage business were involved in investigating the deal’s “due diligence,” the review of Countrywide’s books and operations, according to a former mortgage executive that was party to the finer details of the transaction. Disappointed at having little say, Bank of America mortgage executives were concerned about the strategic fit and reputational risk of acquiring Countrywide.

Bank of America had exited the business of subprime mortgages (loans to borrowers with riskier credit profiles) back in 2001. By late 2007, the bank had also stopped selling mortgages through brokers, a major business tactic for Countrywide but one that Ken Lewis himself had criticized for producing loans he referred to as “toxic waste.”

Elsewhere in the bank, other executives were familiar with Countrywide because the bank had purchased loans from the lender for its own investment portfolio. Some people were worried about the possibility that investors who had bought securities backed by Countrywide mortgages might someday demand the bank repurchase the loans if they went bad –  the exact scenario that ultimately played out in the coming years.

“The people who understood the mortgage business were clearly providing candid and factual feedback to the diligence team,” one executive said. “What they did with that information, there is no way I could answer that question.”

At the time, Lewis said the bank’s “extensive due diligence supports our overall valuation and pricing of the transaction.”

Few inside or outside the bank envisioned the tens of billions in losses that were to come, and the tsunami-like financial crisis that was still a few months away. Throughout its history, Bank of America had often profited by buying down-and-out companies at bargain prices.

Some advocates initially lauded Bank of America for being a white knight in reforming an industry villain and from the outset the bank pledged to abandon Countrywide’s subprime lending practices, but praise for Bank of America soon evaporated as foreclosures mounted in the recession, fuelling homeowner anger and protests around the country.

Mortgage losses began to increase at the end of 2010 and into 2011 as investors began filing claims asking the bank to buy back defective mortgages. In June 2011, the bank announced an $8.5 billion settlement with private mortgage-bond investors that proved to be a sign of the eye-watering payouts that were to come.

“The damage to Bank of America as a company is defined by much more than just dollars and cents,” said one banking consultant.

“It was reputational. It has tainted Bank of America probably forever.”

Here at The W1nners’ Club we’d like to say that the world shouldn’t be so harsh on Bank of America for making such a foolhardy decision. Our publisher Darcus White once acquired a girlfriend that was almost as unsuitable as Countrywide finance and she too cost him a fortune in unexpected costs however, his reputation was already tarnished way before he met her.

 

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