Bank of America Confirms Deal to Buy Troubled Lender

CHARLOTTE, N.C. _ Bank of America Corp. on Friday confirmed it’s buying troubled lender Countrywide Financial in an all-stock transaction valued at $4 billion.

The purchase will make the bank the nation’s largest mortgage lender and loan servicer. In August it sunk $2 billion into the troubled lender, which has found it difficult to fund its operations in the nation’s mortgage meltdown. The marriage also could expose a legal loophole that would let the bank eclipse a cap on U.S. deposits.

The highly acquisitive Bank of America, however, is picking up a struggling company carrying a loan portfolio marred by rising defaults and foreclosures. That led analysts to surmise, as reports about the pending deal surfaced on Thursday, that regulators could be behind a deal to protect Countrywide’s government-insured deposits and to prop up a key player in the turbulent mortgage market.

“If something’s not done, the taxpayers eventually could own this company,” said Dick Bove, analyst with Punk Ziegel & Co.

Through its history, Bank of America and its predecessors have been known for buying distressed institutions with lucrative results. In one of its most famous deals, it snared Texas’ largest bank, First RepublicBank, in a bailout supervised by the Federal Deposit Insurance Corp., which insures customers’ deposits.

A transaction could be structured in a way that Bank of America bears a lower cost if the deal doesn’t work out well, a knowledgeable source said. Otherwise buying Calabasas, Calif.-based Countrywide would pose Bank of America with the risk of absorbing bad loans and possible lawsuits.

“We are aware of the issues within the housing and mortgage industries,” Bank of America chief executive Ken Lewis said in a statement. “The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”

Buying Countrywide will be another big deal for Lewis, who has spent more than $100 billion expanding the bank since he took charge in 2001.

In August, Bank of America invested $2 billion in Countrywide, once a major subprime lender, in exchange for high-yielding securities that could be converted into a 16 percent stake in the lender. The two institutions are competitors, but also have a long business relationship. Countrywide CEO Angelo Mozilo founded the company in 1969 with a $75,000 Bank of America loan.

The August transaction gave Bank of America the right of first refusal to buy the whole company, but the bank had repeatedly denied any interest in doing such a deal. Initially, it looked like a savvy investment for Bank of America, but it has lost luster as Countrywide’s shares plunged.

The Countrywide purchase allows Lewis to fulfill a goal to be No. 1 in mortgages, one of the consumer banking areas his company doesn’t dominate. Through the first nine months of 2007, Countrywide originated $339 billion in mortgages for 17.2 percent market share, according to Inside Mortgage Finance. Bank of America was No. 5, with 7.3 percent market share. Charlotte rival Wachovia was No. 7, with 4 percent.

Guy Cecala, publisher of Bethesda, Md.-based Inside Mortgage Finance, said Countrywide has been seen by many as “too big to fail” because of its symbolism as the nation’s biggest mortgage lender and because it plays a critical role in collecting payments on more than $1 trillion in loans.

The Bank of America purchase is “really the only way to reasonably clean up something like Countrywide,” he said.

To the bank’s benefit, it will gain systems and processes that are seen as the best in the industry. The lender, for example, opens envelopes and processes checks more cheaply that any of its competitors, Cecala said.

Bob Maneri, a managing director with Victory Capital in Cleveland, said the bank also gets access to 9 million customers to which it can cross-sell other products. The bank also might be able to cut costs. Countrywide has already eliminated about 11,000 jobs in recent months.

Countrywide comes with a thrift with $61 billion in deposits. Before the mortgage market meltdown this summer, the lender originated loans with borrowed money, then sold the mortgages to investors. When its credit dried up, it worked to attract deposits from lenders as a source of money for its loans, acting more like a traditional bank.

Bank of America controlled about 9.88 percent of U.S. deposits after buying Chicago-based LaSalle Bank for $21 billion on Oct. 1. Under federal law, banks cannot surpass 10 percent of total U.S. deposits through an acquisition. But a loophole allows a bank to buy a thrift, also known as a savings and loan, with no such prohibition.

Bank of America is the nation’s biggest bank by market value at about $174 billion. Through the first nine months of the year, the company made about $14.7 billion in profits.

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