Behind Bank of America’s Big Gamble

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The endgame in Bank of America Corp.’s $4 billion takeover of Countrywide Financial Corp. began with a December phone call from Countrywide Chief Executive Angelo Mozilo to his Bank of America counterpart, Kenneth D. Lewis, the Wall Street Journal reports.


After more than six months of financial deterioration at Countrywide — despite a $2 billion infusion of cash from Bank of America in August — Mr. Mozilo said he was ready to throw in the towel, according to Mr. 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,” Mr. 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, based in Charlotte, N.C., deployed 60 analysts 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. 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 shares 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 Mr. Lewis said he does not anticipate that happening. The deal is expected to close in the third quarter. Countrywide declined to discuss the deal.


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