Bank of America Buys Countrywide

Last August, Bank of America bought a 16% stake in trouble mortgage firm Countrywide for $2 billion. The shares in Countrywide continued to fall, so BoA is doing what many gamblers know not to do, increase the bet to get back to even. Friday, BoA bought the rest of Countrywide for $4 billion.

There is a saying on Wall Street, “the market can stay irrational longer than you can stay solvent.” BoA is hoping that a certain rationality returns to the home lending market before Countrywide is forced to run up the white flag altogether. Its portfolio of loans isn’t improving, and in order to keep depositors happy, it has had to increase the interest it pays out.

BoA does lag behind many of its peers in the mortgage business, and it’s always easier to buy a business than to build it from scratch. And in the long run, it is a good business for a bank to have. As a general rule, housing prices go up when one looks at things more than a few years out. The question is whether this exercise in bottom fishing really will work out well enough to justify spending $6 billion.

Countrywide has 9 million borrowers, and only a fraction of them are in financial straits. BoA has an opportunity to sell other financial products to them, and it should find that many of these people are in search of IRAs, student loans, annuities and small business loans. The mortgage business will be back in a year or three, and BoA will benefit from that because it has bought Countrywide.

At the same time, it needs to pull the problem mortgages from its portfolio and give them to a special work-out crew. BoA has said it will do this, and it has said it’s out of the subprime mortgage business for good. Maybe these things will get Countrywide back on its feet, but it is hard to see that it was worth $6 billion.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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