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The endgame in Bank of America's (BAC, news, msgs) $4 billion takeover of Countrywide Financial (CFC, news, msgs) began with a December phone call from Countrywide Chief Executive Angelo Mozilo to his Bank of America counterpart, Kenneth D. Lewis.
After more than six months of financial deterioration at Countrywide -- despite a $2 billion infusion of cash from Bank of America in August -- Mozilo said he was ready to throw in the towel, according to Lewis.
At the same time, having watched Countrywide dramatically retool its operations in a bid to survive, Bank of America executives began to believe Countrywide's big U.S. mortgage business might be worth having.
"The ability to get that kind of size and scale became more appealing as we saw the business model change to a model we could accept," Lewis said. "We considered the lawsuits, the negative publicity that Countrywide had. We weighed the short-term pain versus what we think will be a very good deal for our shareholders."
Bank of America deployed 60 analysts from its headquarters in Charlotte, N.C., to Countrywide's headquarters in Calabasas, Calif. After four weeks analyzing Countrywide's legal and financial predicament, and modeling how its loan portfolio was likely to perform, Bank of America offered an all-stock deal valued at $4 billion for Countrywide -- a fraction of the company's $24 billion market value a year ago.
The deal is a landmark in the housing crisis, given Countrywide's prominence as the nation's largest mortgage lender, at least until recently.
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Overdue payments are surging
Bank of America's move is a gamble that the U.S. is nearing a housing bottom and crystallizes the divide on Wall Street over whether now is the time to buy housing-related assets on the cheap -- or flee from them to avoid further losses.Terms of the deal call for Bank of America, the largest U.S. bank by market value, to give 0.1822 share of Bank of America for each share of Countrywide.
The deal could be renegotiated if Countrywide experiences a material change that adversely affects its business, but Lewis said he does not anticipate that will happen. The deal is expected to close in the third quarter. Countrywide declined to discuss the deal.
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The trouble with banksHousing is 30% overvalued and a bottom in the real estate market is years away, according to venture capitalist and hedge-fund manager Peter Thiel, who says the financial-services sector won't recover until the mess is cleaned up.
As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans -- where Countrywide doesn't have first crack at the collateral in case of default -- or option adjustable-rate mortgages, which let borrowers make minimal initial payments and face sharply higher ones later.
Overdue payments by Countrywide borrowers are surging as house prices drop and loans reset to higher payments.
Continued: Rumors of a bankruptcy filing
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