Throwing Good Money after Bad: Bank of America Buys Countrywide

Bank of America's acquisition of Countrywide is a good acquisition for the latter's employees (and for those who bought the latter's stock two days ago). It also stops the knock-on effects of the mortgage meltdown. But, it is potential disaster for Bank of America.

Bank of America wants to save face.  Last year, they tried to get Countrywide and Angelo Mozilo out of a jam by investing $2 billion to buy a note that could be converted into 16% of the company's ownership (at a conversion price of around 18%).  But, Countrywide just kept falling, until hitting $4.5 / share on January 9 amidst rumors, seemingly well-founded that the company's liabilities significantly exceed its assets.  Some analysts surmised that without an immediate cash infusion, Countrywide would be bankrupt in 2 weeks. 

This morning comes news that Bank of America doesn't want to see its $2 billion go to waste.  Instead, they are going to throw $4 billion more into the fray.  With all of Countrywide's obligations, mortgage debts and problems, many influential analysts have suggested that they may be assuming as much as an additional $8 or $9 billion over the next two years in expenses, assumed obligations and write-downs.

What are they getting?  The most valuable asset that Countrywide has is its servicing business.  On the other side of this housing mess, that business is a valuable asset.  There may be other syergies that Bank of America can exact too.  But, even with the servicing business and the other synergies, this piece of junk is never going to return to Bank of America the $14 - $15 billion that it is going to cost them.

Terrible acquisition.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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  • Sam Cass

    January 12, 2008

    I agree. I think Bank of America bought a failed company in a failing industry. The mortgage mess will probably deepen before it gets better and it will not return to the good old days for a long time, if ever. With CDO discredited, the days of easy credit are over, and that's what fueled the real estate boom. No more easy credit, no more boom. Without the sub-prime loans, the mortgage business has razor thin profits.

    The only thing BofA can hope to do is cross-sell the mortgaeg base.

  • tightwad

    January 12, 2008

    I have to agree. I do however have deposits in the banking end of Countrywide, and hope I can breath a little easier for awhile. I do see B of A eventually cutting the rates now being paid on Countrywides banking products.

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