Can Bank of America Bailout Countrywide One Last Time?

Implications: Mums the word from Bank of America and Countrywide on whether BofA plans to swoop in and bailout Countrywide from a sudden fate of bankruptcy. Countrywide reported that foreclosures and late payments rose to the most in five years in December 2007. Countrywide's shares has fallen 28% this week and its market capitalization has plummeted to approximately $4.5 - $4.8 billion. In 2007, Countrywide's shares fell 79% and Countrywide loss $19 billion in market value in 2007. If the deal with Bank of America and Countrywide is doable, BofA could pay less than it paid last summer when it took a 16% stake of Countrywide with a $2 billion investment. The deal gave BofA the right of first refusal to buy the whole company but the bank had denied any interest to take the whole enchilada. BofA is close to the 10% cap of total deposits with 9.88% and Countrywide operates a thrift worth $61 billion in deposits and a loophole in the federal law allows a bank to buy a thrift with no such restrictions.

Analysis: Bank of America exited the subprime business in 2001, however, when the mortgage market collapsed in 2007, it surfaced that Bank of America hadn't completely lost its appetite for the subprime mortgage market, after it was revealed that Bank of America had invested in SIVs, which were tied to the subprime market and Bank of America wrote down $1.46 billion in 3Q07, in leveraged loans, mortgages and structured products. Banks are scheduled to begin reporting 4Q07 earnings and losses next week and the deal with Bank of America and Countrywide may or may not get done. The devil will be in the details, however, in the past, Bank of America has scored lucrative deals by buying banks in distress.

1.  Countrywide's business practices have been questioned as allegations that Countrywide fabricated documents in a bankruptcy case in Philadelphia and allegations its brokers were deceptive in qualifying subprime borrowers for mortgage loans and put them into homes they could not afford and Countrywide is accused of misleading investors about its lending practices by claiming it could weather the downturn in the housing market and may have artificially boosted its income by understating loan loss reserves

2.  According to regulatory filings, Countrywide's founder, Angelo Mozilo, could reap as much as $115 million in severance pay if he is fired or voluntarily quits and he would still get free rides on the company jet and Countrywide would pick up his country club bills until 2011. This looks like another pay-for-failure package

Takeaway:  If Bank of America and Countrywide's marriage is a "go," Bank of America would get a name brand in the mortgage business, even though Countrywide's brand is tarnished right now. In addition, Bank of America may gain access to more than nine million customers that it may not have a relationship with and the opportunity to cross sell more of its  products and services.  This could be another "win" for Ken Lewis.