Bank of America's risky bet

Bank of America already has a full plate. It is still digesting its $3.3 billion acquisition of U.S. Trust and the $21 billion purchase last year of Chicago's LaSalle Bank.

The same team that reviewed the Countrywide acquisition is also leading the restructuring of Bank of America's troubled corporate and investment bank, which has taken its own big hits in the credit-market turmoil. Lewis said the deals are "nicely sequenced" because each integration plan is at a different stage.

BofA made its initial investment in Countrywide in August, purchasing preferred shares convertible to a 16% stake in the company. The deal also gave Bank of America a first right of refusal for buying all of Countrywide. Initially, Countrywide shares rallied, but they fell precipitously toward the end of the year as Wall Street firms began taking huge write-downs on mortgage-related investments.

• Talk back: Did the Fed engineer the Countrywide bailout?

It became difficult for Countrywide to remain independent. It was in danger of losing its investment-grade rating, making it harder to borrow money and collect deposits.

Another risk was that the eroding value of its assets might force it to break covenants with bank lenders, potentially triggering demands for immediate repayment of its debts. And a barrage of negative headlines about its lending practices during the housing boom was damaging the company's reputation.

After Mozilo's call in early December, Bank of America sent dozens of bankers to California, where they holed up at the West Lake Village Four Seasons near Calabasas, according to people involved in the process.

A key player during the negotiations between Countrywide and Bank of America was Edward Herlihy, a senior partner with the law firm Wachtell, Lipton, Rosen & Katz, who represented Countrywide. Herlihy has advised Bank of America for almost two decades and knows Lewis well. Those relationships proved crucial in brokering the deal, a person familiar with the matter said.

On Dec. 28, Mozilo met at Countrywide's headquarters with Herlihy and other advisers, with Lewis participating by phone. The two sides agreed to pursue a deal, and on Jan. 4, Herlihy presented the plan to Countrywide's board along with investment bankers from Sandler O'Neill. They rushed to complete it this past week as speculators drove Countrywide's price below $5 amid rumors of a bankruptcy filing, which the company denied.

Continued: 'No pressure and no prior discussion'

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