BofA sees right time for a deal
As a glut of global capital gave way this year to a financing drought, Bank of America Chairman Kenneth Lewis was on the watch for deals.
Bank of America, with one-tenth of all U.S. bank deposits, had plenty of money. Lewis saw that there might be a chance to buy into smaller financial companies that had been hit by rising mortgage loan defaults and other problems.
“Ken had told people for several months to be on the lookout,” BofA spokesman Robert Stickler said. “We have plenty of liquidity, and it looked like there might be chances to put it to use.”
The opportunity arrived this month when executives at mortgage giant Countrywide Financial Corp., suddenly struggling for cash to fund loans, “decided they needed a partner and were looking around,” Stickler said.
An accord announced late Wednesday, in which BofA agreed to invest $2 billion for a potential 16% stake in Calabasas-based Countrywide, was a vote of confidence in the home-loan company. It also could lead to closer operational ties between the two financial institutions.
“There’s nothing firm here yet, but if you look at the operations of both companies strategically, there’s a lot that can be done,” Countrywide Chief Executive Angelo R. Mozilo said in an interview Thursday, depicting Wednesday’s transaction as a win-win deal between old friends who are logical partners.
He suggested that Countrywide, the nation’s No. 1 mortgage company, could originate home loans and collect payments more efficiently than Bank of America. And Charlotte, N.C.-based BofA, by far the largest retail bank, has a host of services that Countrywide customers might want.
“They service mortgages, which is a very complex business. We do that as well -- a lot more of it,” Mozilo said. “They have bank customers like we do, but they have checking accounts and we don’t. When you start looking where the holes are, you see a lot of efficiencies.”
Mozilo said it was too early to discuss in detail how any strategic ventures would work.
It’s clear that Countrywide could use a new start after falling victim to the global credit crunch. The crisis began with a surge in delinquencies and foreclosures that drove dozens of sub-prime mortgage specialists out of business in late 2006 and early this year, then spread to the broader credit markets.
By early this month, Countrywide had buyers only for its most traditional -- and least profitable -- loans. And its Wall Street lenders and buyers of its medium-term IOUs had stopped providing funding for it to make new loans and service the ones on its books.
With its delinquencies and foreclosures mounting, a Merrill Lynch & Co. analyst delivered a near-fatal blow last week by suggesting deep in a lengthy report that Countrywide might seek bankruptcy protection. The comment was reported widely by The Times and other media outlets.
“It’s so irresponsible to put that out there,” Mozilo said, “because there wasn’t one grain of truth to it.”
Whatever the truth, the comment sent Countrywide Bank depositors into branches to withdraw funds and sent the company’s stock tumbling.
It also sent Mozilo into the arms of Bank of America, which will earn more than 7% a year on its $2-billion investment. BofA can convert the stake into Countrywide common stock at $18 a share.
Countrywide had closed last year above $41 a share. Mike McMahon, a former bank industry analyst who is now a private investor, said BofA appeared to have made a long-term investment at a great price.
Mozilo also got what he needed, McMahon said: survival. “I think they were a lot closer to the edge than they let on,” he said, calling the lack of funding a “near-death experience.”
Mozilo said the company had been in bad shape but not in danger of collapse.
“Countrywide was safe and sound, despite what was printed by the media, but the readers didn’t know that,” he said. “We had to get a partner that was well respected” on Wall Street and by the lender’s customers.
The deal had sent Countrywide shares sharply higher in after-hours trading Wednesday.
But Thursday -- a day when most financial stocks fell -- Countrywide closed at $22.02, up only 20 cents from the end of regular trading Wednesday.
BofA rose 18 cents to $51.83.
Countrywide shares traded as high as $24.46 early Thursday, but fell after Mozilo said on national television that a recession was likely because of the mortgage industry’s problems and what he called an overreaction to them.
“When you have this level of delinquencies and foreclosures, there is no way it doesn’t have an impact on psyches and wallets,” Mozilo told business channel CNBC.
“This is one of the greatest panics I’ve seen in 55 years in financial services.”
For Bank of America’s Lewis, an acquisitive executive whose previous minority investments in Chinese, Mexican and Brazilian banks have paid off handsomely, the transaction was a carefully calculated one, bank executives said.
The agreement, however, came together quickly. A Bank of America team went over the books at Countrywide’s headquarters. Lewis flew out to meet with Mozilo. And after a few days of negotiating, the deal was done.
“From our perspective,” Stickler said, “the market was not distinguishing very well between the good guys and the bad guys -- between the guy who was just lending recklessly and the one who had done a pretty good job” but who had made a lot of loans of the type that government-sponsored mortgage finance firms Fannie Mae and Freddie Mac weren’t buying.
Mozilo, who got Countrywide started in 1969 with a $75,000 loan from BofA, has maintained business relations with the bank ever since. He said he has had good relationships with all of BofA’s leaders including Lewis, with whom Mozilo said he had previously “talked about various strategic initiatives.”
Mozilo didn’t elaborate. Stickler said Lewis wasn’t giving interviews Thursday.
McMahon said Mozilo had told him previously that discussions early this decade had focused on the possibility that BofA could save money by outsourcing mortgage originations and perhaps other services to Countrywide.
Given Countrywide’s highly efficient mortgage operations, “It would be easy to have Bank of America route mortgage calls over there, have a Countrywide employee pick up the phone and answer, ‘Bank of America,’ ” McMahon said.
Countrywide, a powerful presence in all segments of the mortgage market, was the No. 3 sub-prime lender last year and the second-largest in the so-called alt-A category, which falls between sub-prime and the safest “prime” loans.
Funding for sub-prime and alt-A loans has now dried up. The sub-prime sector may have been permanently damaged, Mozilo said, but the market should revive at some point for classic alt-A loans -- mortgages for borrowers with good credit and solid down payments who don’t fully document their incomes.
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