Friday, July 01, 2011

BofA's CountryWide Tab Explodes

Back in January of this year, I wrote this post concerning the escalating tab for Ken Lewis' purchase of CountryWide in 2008 for BankAmerica, of which he was CEO. I wrote then,

"So that makes the running tab for Countrywide $9B, when you include the $18/share purchase of Countrywide equity in August of 2007 for a total of about $2B. By the way, when Lewis made the January purchase, Countrywide's stock was less than half its August price, or $8/share.

According to the Journal article, a Sanford Bernstein analyst assesses the additional put back risk to BofA at as much as $4B."

On Wednesday, current BofA CEO Brian Moynihan settled outstanding claims on Countrywide bonds and 'defective' mortgages for $8.5B and $5.5B, respectively, plus an additional $6.6B prospectively for future costs and losses against old Countrywide business.

Adding this $20.6B in losses to the prior $9B cost,  and you get the Wall Street Journal's subheadline $30B cost of Countrywide to BofA. They printed this comment regarding the deal Lewis so extolled at the time he made it in mid-2008,

" 'It turned out to be the worst decision we ever made,' said one Bank of America director who voted for the Countrywide deal. "

According to the Journal piece, this may not be the end of BofA's losses on the deal.

My old mentor at Chase Manhattan Bank, Gerry Weiss, made sure several of us who worked for him got plenty of contact with the bank's EVPs, Vice-Chairman, CEO and Chairman. He used to say that many of them woke up in the morning saying, as they looked into the mirror to shave,

'God, don't let them realize today how incompetent I really am and how little I actually know about what I'm doing.'

Next time you read or hear about some large US bank CEO making an incredible acquisition, think carefully about whether you believe him or her.

Citigroup should have been bankrupt by now, and is still headed by an inexperienced, over-matched former middle-office manager of an investment bank. Wells Fargo is choking on its own acquisition of Wachovia's problems from Golden West, the former California S&L, as well as its own real estate portfolio. Chase remains simply slower and stodgier than the other large commercial banks, thus having accidentally avoided the worst of the last financial crisis.

Ken Lewis' type of self-inflicted fiasco at BofA could easily happen again.

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