Bank of America to buy Countrywide for $4 billion

By Jonathan Stempel1 hour, 18 minutes ago

Bank of America Corp (BAC.N) said on Friday it agreed to acquire battered mortgage lender Countrywide Financial Corp (CFC.N) in a $4 billion transaction that could help avert one of the biggest collapses from the U.S. housing crisis.

The purchase constitutes another major but risky acquisition for Bank of America Chief Executive Kenneth Lewis, who has spent more than $100 billion through mergers to create the second-largest U.S. bank.

It may provide a lifeline for Countrywide, which has been battered by mounting losses, borrower defaults, and a slew of lawsuits and regulatory probes into its lending practices, and for the compensation of longtime Chief Executive Angelo Mozilo. Countrywide's market value was $26 billion less than a year ago.

"I'm breathing a big sigh of relief," said Nancy Bush, managing member of NAB Research LLC in Aiken, South Carolina. "This takes out a major point of uncertainty in the industry. It's certainly good for financial stocks overall."

Shares of Countrywide fell 82 cents, or 10.5 percent, to $6.93 in pre-market trading, after rising 51.4 percent on Thursday in anticipation of the transaction. Bank of America rose 75 cents to $40.05 in pre-market trading.

Countrywide shareholders would receive 0.1822 of a Bank of America share in exchange for each of their shares.

The transaction values Countrywide at $7.16 per share, a 7.6 percent discount to the Thursday closing price.

RISKS

If the transaction goes through, Charlotte, North Carolina-based Bank of America may be able to salvage a $2 billion preferred stock investment it made in Calabasas, California-based Countrywide in August. That transaction had lost more than half its value on paper.

"We don't feel like we're anywhere near out of the woods in this whole mortgage market, housing market, subprime morass," said Michael Mullaney, who helps invest about $10 billion at Fiduciary Trust Co in Boston. "I'm hoping it's not a save-face action from Ken Lewis."

On a conference call, Lewis acknowledged "near-term challenges" in mortgages, with expectations that volumes will fall amid "continued weakness in housing throughout 2008."

Still, he said Bank of America conducted "extensive due diligence" on Countrywide, calling the purchase a "one-time opportunity" to buy a powerful mortgage lender at "very attractive" terms.

Bank of America expects a $1.2 billion restructuring charge from the transaction, and said it will need a couple of billion dollars of new capital to help preserve its capital ratios.

It expects by 2011 to realize $670 million of after-tax cost savings, or 11 percent of the combined companies' mortgage expenses.

The bank expects the transaction to close in the third quarter, and add to earnings per share in 2009. It also said the thrift status of Countrywide's banking unit means the addition of the company's $61 billion of deposits would not cause Bank of America to breach a 10 percent federal cap on deposits.

LIGHTNING ROD

Mozilo a butcher's son from the South Bronx who co-founded Countrywide in 1969, has been a lightning rod for critics who say he encouraged loose lending practices that contributed heavily to the housing crisis.

Lewis said he would like the 69-year-old Mozilo to stay with Countrywide until the merger closes, after which "I would guess he would want to go have some fun." He also said he would like to retain "a number" of senior Countrywide executives.

Countrywide made $408 billion of mortgages in 2007, roughly one in six U.S. home loans. It also handles billings on some $1.48 trillion of mortgages in its servicing portfolio.

However, it made far fewer loans as the year wore on after it lost access to credit markets. It stopped making most of the variable-rate and subprime mortgages that caused many of its problems in the first place.

Countrywide lost $1.2 billion in the third quarter, and on Wednesday said defaults and late payments in its servicing portfolio reached the highest on record.

"It's naive to think we are at the end of the process in terms of recognizing losses from the mortgage crisis," said Rick Meckler, president of LibertyView Capital Management, a Jersey City, New Jersey, investment firm.

Countrywide essentially stopped making subprime home loans, and Bank of America, which has not made those loans since 2001, said the combined company will not make them either.

Mozilo has also been faulted for collecting hundreds of millions of dollars in compensation this decade, including millions after it was clear the housing crisis had begun. He could receive another $36.4 million if the merger goes through, according to regulatory filings and compensation experts.

Bank of America's own bankers and the law firms Cleary, Gottlieb, Steen & Hamilton LLP and K&L Gates advised the bank on the merger. Sandler O'Neill & Partners LP, Goldman Sachs & Co and the law firm Wachtell Lipton Rosen & Katz advised Countrywide. Sandler also advised Countrywide's board of directors.

(Reporting by Jonathan Stempel; Additional reporting by Joseph A. Giannone, Christian Plumb and Caroline Valetkevitch; Editing by Derek Caney and Dave Zimmerman)