Bank of America's big gamble

But few of his bets match the one placed on Friday, when Bank of America announced it was buying Countrywide Financial Corporation – the mortgage giant brought to its knees by the housing crisis "and its own lax lending standards” – for an estimated $US4 billion.

In the long run, a union between the America's largest mortgage service provider and its largest bank may prove formidable, says Newsweek. But in the short term, it looks "awkward at best."

Bank of America is buying into a company that "has been a symbol for the mortgage crisis” – delinquent loans and legal liabilities and all.
Before it went pear-shaped, Countrywide was an industry leader that other companies looked up to, says Eric Hovde, CEO of Hovde Capital Advisors, in an interview with Newsweek's David Koeppel.

And Countrywide's high-profile chief executive, Angelo Mozilo, had the loudest voice in the industry, adds Hovde. "He could have provided guidance to prevent this mess from occurring.”

But he didn't. And now Bank of America is set to absorb roughly $100 billion in mortgage-related securities and "a lot of assets of the most toxic nature."

For Lewis, the payoff rides on how he manages the acquisition, which is expected to close no earlier than the third quarter of this year.

Chief among his goals will be converting Countrywide's mortgage customers into profitable clients of other financial services, says Duhigg.

This will involve integrating two vastly different cultures, preventing or at least hedging against further declines in the value of Countrywide's assets, and soothing anxious investors – "all as the housing market weakens and the economy teeters on the edge of a recession.”

But "there's still an awful lot of meat on the bones at Countrywide, and Ken is getting it at a great price,” says Tom Brown, a hedge fund manager and longtime critic of Bank of America, quoted in the Times. "It's been at least a decade since I liked any of B of A's deals. But this one may make sense.”

Moody's Investors Service, however, is not as confident. The credit rating company has said it might cut the bank's financial strength rating, currently A, in light of the acquisition.

Indeed, Bank of America has stumbled over Countrywide before, says Duhigg. After an extensive analysis of the lender it paid $2 billion last summer for a 16 per cent stake. Since then, Countrywide stock has plummeted by more than 60 per cent.

"I would expect (Lewis is) going to spend the next few weeks on airplanes convincing his institutional investors he knows what he's doing,” says John Kanas, who headed North Fork Bank for 35 years before overseeing its acquisition by Capital One.

To make that case, says Duhigg, Lewis will probably point to Bank of America's 2005 acquisition of credit card giant MBNA, an analogy he made in a conference call with analysts Friday morning.

Then, like now, sceptics said the $35 billion purchase posed serious integration challenges. But the pairing ended so successfully it inspired two Bank of America managers to rewrite the lyrics to the U2 song "One,” in celebration.

"At the end of the day, this deal catapults B of A into a dominant position that puts them in contact with almost every aspect of a consumer's financial needs,” says Walter O'Haire, a senior analyst at Celent, quoted in the Times.

"It's like watching professional poker,” says O'Haire. "You have to look at how they've played in the past, how much they've got in the pot, and then basically do a gut check.”

Bank of America's chief makes a big bet, Charles Duhigg, The New York Times

Countrywide's white knight, David Koepell, Newsweek