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Subprime Lending: Countrywide no more

Posted January 11, 2008

“Bank of America has swept in to save Countrywide from bankruptcy and further infamy… if you can count being bought out by your creditor as ’saved.‘” – Stephanie Grimmett.

by Stephanie Grimmett

Baltimore – (TFN):  All of that rending of flesh and gnashing of teeth you’re hearing may be the subprime feeding frenzy reaching its peak.

In the last year, more than 100 mortgage companies have stopped selling loans, closed down or been bought out by other banks.

And now Bank of America (BAC: NYSE) has announced that it will buy Countrywide (CFC: NYSE) for a mere $4 billion in stock.

Unless you’ve been living in a yak herder’s hut in the Himalayas for the last six months, you probably already know that Countrywide has been dying a slow and painful subprime death. The nation’s largest mortgage lender has lost 82% of its market value and its share price has plummeted 85% to the $6 range in the last year.

Subprime Lending: Bank of America to the rescue

But Bank of America has swept in to save Countrywide from bankruptcy and further infamy… if you can count being bought out by your creditor as “saved.” The mortgage lender was already in a $2 billion hole to BofA, and now the bank is putting $4 billion into the gaping pit of Countrywide’s finances to bring it into the fold.

Bank of America had little choice when it came to getting any of last year’s $2 billion investment back. If Countrywide declared bankruptcy, BofA would have no return on what turned out to be less of a lifesaving rescue for Countrywide, as it was hailed, and more like lending your wallet to a drug addict. You know he’s just going to use it to pay off his dealer.

Bank of America CEO Ken Lewis saw his money going up Countrywide’s metaphorical nose and decided the best thing to do was take the company home and give it a healthy meal and a clean shirt. Perhaps he’s hoping that a little restructuring and a good position in his corporation will give Countrywide’s $209 billion in assets a fighting chance.

Bank of America will acquire Countrywide for about $7.16 per share in stock. But that’s not the total outlay the banking corporation expects.

Subprime Lending: Countrywide costs

According to estimates, BofA will have to write down up to 10% of Countrywide’s assets, about $21 billion, just for the loss in property values over the last year. And the company will incur another $1.2 billion in restructuring costs. That gives Bank of America a $26 billion real price tag on its purchase.

Even at that price, the takeover comes cheap compared to other BOA buyouts in recent history. Lewis bought Massachusetts-based bank FleetBoston Financial Corporation for $48 billion in 2004 and credit card issuer MBNA for another $35 billion in 2006.

The buyout will increase Bank of America’s stake in the U.S. economy. BOA already draws 85% of its revenue from the United States, and the predicted economic downturn could mean bad months ahead for the bank.

But Lewis is looking at what Countrywide has to offer his institution: technology and a well-built infrastructure for retail mortgaging.

If Lewis’s gamble works, Bank of America could see strong consumer banking growth in coming years. If it doesn’t, America’s largest bank (by market value) may slide down a few pegs.

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Posted by Stephanie Grimmett · Filed Under US Stocks and Markets 

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