Why BofA Bought Countrywide

Countrywide's Angelo Mozilo has had many opportunities, over the years, to sell his company for a huge sum to Bank of America. There's only one reason why he would say yes to a deal now, at $4 billion, when he said no to a deal at $30 billion: yesterday's rumors were true, and Countrywide really was insolvent. Mozilo didn't particularly want a deal, but it was better than bankruptcy.

So maybe the real question is this: why is Bank of America willingly paying billions of dollars to take on Countrywide's liabilities? If Countrywide had entered bankruptcy, BofA, as a major creditor, would have likely walked away with most of the firm's assets in any case. And, according to the WSJ, it would have shared bail-out duties with the GSEs:

A failure of Countrywide would have posed a major risk to the U.S. economy, since the lender services about one of every six loans in the country. Bankruptcy likely would have shifted huge financial risk to Fannie Mae and Freddie Mac. A spokesman for the U.S. Treasury Department said agency officials didn't encourage Bank of America to rescue the huge mortgage firm.

I'm not sure how true this is, since as I understand it Fannie and Freddie generally take on borrower credit risk, not servicer credit risk. I'm sure that Countrywide would have continued to service its loans through the bankrupcy process, at no real cost to Fannie or Freddie.

Rather, I think that the thing to remember is that BofA's Ken Lewis has coveted Countrywide for years: he has pretty much always been willing to buy the company at or slightly above the market price. He was faced with an opportunity to by Countrywide for little more than a rounding error in the BofA balance sheet: if he let it slip away from him now, he'd never forgive himself.

And Bank of America has now, overnight, become by far the biggest and strongest and most important operator in the world of US mortgages. Over the long term, that status is going to be hugely valuable for Lewis, even if he has to take some write-downs along the way.

Finally, the Countrywide acquisition solidifies BofA's status as a consumer bank, and helps Lewis's decision to move slowly out of the investment-banking business look strategic. Investors know that if BofA suffers losses, it will be because of errors in lending, and not because some trading desk suddenly blew up one morning. Given that commercial banks trade at higher multiples of earnings than investment banks, that's valuable to Lewis too.