Bank of America to Buy Countrywide for $4B in Stock

By Howard Schneider, Tomoeh Murakami Tse and Dina ElBoghdady
Washington Post Staff Writers
Friday, January 11, 2008 4:14 PM

Bank of America has agreed to buy troubled Countrywide Financial Corp. for $4 billion, rescuing the nation's largest mortgage lender from possible bankruptcy and adding to a financial industry shakeout that has rattled global markets.

The all-stock deal, announced on Friday morning, melds two institutions that sit on opposite ends of the recent crisis in subprime mortgages -- a bank that stopped making risky home loans before many other institutions and a once high-flying lender whose loose practices added to a global problem.

That mortgage crisis has hit hard, forcing some of Wall Street's marquee names into embarrassing disclosures about tens of billions of dollars lost on complicated mortgage deals that had become difficult to value or resell. At the Federal Reserve and other central banks, officials have been preoccupied with containing the problem, pumping currency into the financial system and considering steps to stave off possible recession.

And it still may not have reached bottom. In Asia, stock markets sank Friday after reports in the New York Times that Merrill Lynch may again have to increase, to $15 billion, its estimated losses on mortgage-backed investments. Concerns about Merrill Lynch and a report by American Express Corp. that its profits may be down this year because of dampened consumer spending and increased credit card delinquencies also hurt Wall Street today.

The Dow Jones industrial average was down more nearly 300 points at one point in the day and closed off 247 points at 12,606. Other major indexes were also down.

The acquisition of Countrywide, Bank of America chief executive Ken Lewis said on Friday, a deal driven by price, with the bank acquiring Countrywide's technology, selling expertise, and extensive network of offices and personnel at a fire sale bargain. The deal values Countrywide at roughly $7.16 a share -- nearly 8 percent lower than Countrywide's Thursday closing price of $7.75.

"Valuations are in fact very compelling," Lewis said in a conference call with analysts this morning.

Countrywide was trading at $45 a share less than a year ago -- before the extent of the subprime loan crisis began to surface, and before the flow of money through global financial markets slowed because of uncertainty about how far the problems might spread.

While Lewis said the Countrywide transaction will be good for Bank of America in the long term -- and could stave off a corporate failure that might have had broader economic implications -- the deal did little to encourage investors about the state of the mortgage and financial industries. Bank of America stock was also trading lower, falling at one point by more than 1.5 percent.

Lewis said that, despite Countrywide's troubles, the deal offers Bank of America a cut-rate path to becoming the nation's largest home lender, in addition to being its largest consumer bank. Bank of America already had accumulated the largest deposit base, and was a leader in credit cards and car loans as well.

"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Lewis said in a news release.

Nevertheless, Lewis said the deal was struck only after "extensive due diligence" into Countrywide's financial and potential legal problems, and with a realization that there were still "near-term challenges" for the mortgage industry as a whole. Home sales and values have been plummeting, and Lewis said Bank of America expected "continued weakness in housing throughout 2008."

Still, he said, the addition of Countrywide's extensive sales force and technology are a valuable long-term addition for when the mortgage and housing industries rebound. The deal adds 1,000 mortgage field offices and a 15,000-person sales force to Bank of America's 6,100 banks.

It also gives Bank of America a chance to rescue the $2 billion in cash it had earlier provided to help keep Countrywide in business -- an investment that had eroded in value as the mortgage company's fortunes deteriorated.

No cash will change hands in the current deal. Instead, investors will be given one share of Bank of America stock for every 5.48 shares they own in Countrywide.

Lewis said that many senior Countrywide executives will be kept on, though he expected that chief executive Angelo R. Mozilo will "want to go have some fun" once the deal closes later this year. Mozilo founded the company forty years ago, build it into a mortgage powerhouse that, in less than year, came to symbolize the industry's excesses.

The transaction has been approved by the boards of both companies, but still faces shareholder approval and a regulatory review.

Mozilo, in comments included in the Bank of America news release, called the deal "the right decision" for Countrywide shareholders and others.

In the news release, Lewis said the combined company would not engage in subprime lending, the practice of making home loans to less creditworthy borrowers. Often issued on terms that involved low introductory interest rates, the loans have become too expensive for many borrowers because of subsequent rate hikes, and helped push loan defaults to record levels. Bank of America said it would also support efforts to keep delinquent mortgage holders from losing their homes.

Rumors about the deal began circulating on Thursday, and shares in Countrywide more than doubled after reports about the possible transaction appeared on the Wall Street Journal's Web site. Countrywide shares on Thursday closed up 52 percent, or $2.64, at $7.76.

The New York Stock Exchange said it contacted Countrywide in light of the "unusual market activity," and asked it to issue a statement on any corporate developments that may be behind it. Countrywide declined to comment, the NYSE said. The company did not return phone calls Thursday.

A Bank of America spokesman also declined to comment at the time, saying the company does not comment on market speculation.

The deal talk comes after a long and painful slide for Countrywide, which became a major industry player during the recent housing bubble. In 2006, it issued about a fifth of U.S. home loans in terms of dollar amount, helping to extend a mortgage boom that has come crashing down, hitting the balance sheets of financial companies everywhere and threatening to push the economy into a recession. The company posted its first loss in 25 years during the third quarter, and some analysts expect further losses in the fourth quarter.

Although the terms of a deal were unclear last night, some analysts speculated that the purchase price would disappoint Countrywide investors.

Paul Miller, an analyst at Friedman, Billings, Ramsey Group, said that Bank of America could probably acquire Countrywide at a bargain.

"Countrywide is probably on the verge of bankruptcy," Miller said. "It will be negotiating from a point of weakness."

If Bank of America does buy Countrywide, it would probably do so for less than $7 a share, Miller said. Bank of America is probably trying to assess the anticipated losses from Countrywide loans gone bad and factoring those into the price, he said. Miller estimates that the cumulative losses over the life of those loans could be as much as $6 billion.

Countrywide has $90 billion of loans on its books. Of those, $32 billion are home equity lines of credit and $27 billion are payment option ARM loans, which are loans that allow the borrower to decide how much to pay each month toward principal and interest. "Those loans are deteriorating rapidly," he said. "That has to be factored into the deal price, and once you factor that in, [Bank of America] has to wonder if they want this."

If the deal does not go through, Miller said he suspects Countrywide's shares will drop further.

Countrywide shares have steadily declined from a high of $45 in February of last year. With the lender's shares hovering just under $22 in August, Bank of America made a $2 billion equity investment to shore up the company. That deal gave Bank of America about a 16 percent stake in Countrywide. The bank now owns preferred shares that can be converted into common stock at $18 each and that carry an interest rate of 7.25 percent.

Despite the infusion, Countrywide shares continued their slide as the housing and mortgage markets worsened.

The purchase of Countrywide could help Bank of America, based in Charlotte, recoup its $2 billion investment. With shares now trading in the single digits, Countrywide's market capitalization stands at just $3 billion.

The lender received its latest blow Tuesday when investors sold off its stock on rumors, denied by Countrywide, that the company was contemplating a bankruptcy filing. Then on Wednesday, Countrywide reported that foreclosures and late payments on mortgages in December soared to their highest levels in five years, prompting some analysts to express alarm.

Tse reported from New York.