KEY POINTS:
Bank of America will buy battered mortgage lender Countrywide Financial for US$4 billion, a move that could avert one of the biggest collapses from the United States housing crisis.
The purchase marks another major but risky acquisition for Bank of America chief executive Kenneth Lewis, who has spent
more than US$100 billion ($128.94 billion) since 2004 to create the second-largest US bank, and the nation's largest consumer bank by far.
It would also provide a lifeline for Countrywide, which had become a poster child for what critics say were lending excesses that fuelled the housing and credit crunch.
The largest US mortgage lender has been convulsed by mounting losses and defaults, a loss of access to credit markets, and a slew of lawsuits and regulatory probes into its lending practices and chief executive Angelo Mozilo's pay.
It last week denied rumours that it might go bankrupt.
Before Friday, Bank of America had a roughly US$1.3 billion paper loss on the US$2 billion it injected into Countrywide in August as the global credit crisis deepened. Countrywide's market value has slid by about US$22 billion in the past year.
"I'm breathing a big sigh of relief," said Nancy Bush, managing member of NAB Research LLC in Aiken, South Carolina. "This takes out a major point of uncertainty in the industry."
The purchase calls for the exchange of 0.1822 of a Bank of America share for each Countrywide share. It values Countrywide at US$7.16 a share, a 7.6 per cent discount to its Thursday closing price.
Countrywide shares, which had risen 51.4 per cent on Thursday in anticipation of a merger, were down US$1.20, or 15.5 per cent, at US$6.55 in afternoon trading. Bank of America fell US36c to US$38.94.
Shares of Washington Mutual, the largest US savings and loan and also a troubled mortgage lender, rose on Friday after CNBC television said it had held "very preliminary" merger talks with JPMorgan Chase.
Combining Bank of America with Countrywide would create a company that makes close to a quarter of US mortgage loans, roughly twice as many as at second-ranked Wells Fargo.
On a conference call, Bank of America's Lewis acknowledged near-term challenges in mortgages, with expectations that volumes will fall amid continued weakness in housing through 2008.
Still, he said Bank of America had conducted extensive due diligence on Calabasas, California-based Countrywide, calling the purchase a "one-time opportunity [to buy] when the value is very attractive".
It wasn't immediately clear how many jobs might be lost.
Barney Frank, a Massachusetts Democrat who chairs the House of Representatives financial services committee, said the purchase could be a "positive development" in the sub-prime mortgage crisis.
He also urged Mozilo to donate some of his recent pay to nonprofit groups trying to help sub-prime borrowers to avoid default.
Mozilo has been faulted for collecting some US$387 million from pay and stock option gains from 2002 to 2006, and millions more last year after it was clear the housing crisis had begun.
Joe Price, Bank of America's chief financial officer, said the Charlotte, North Carolina, company could add Countrywide's US$61 billion of deposits without breaching a 10 per cent federal cap because of the thrift status of Countrywide's banking unit.
Not everyone considers the timing ideal.
"We don't feel like we're anywhere near out of the woods in this whole mortgage market, housing market, sub-prime morass," said investment manager Michael Mullaney.
Yet Citigroup analyst Keith Horowitz wrote: "Buying a market leader at a very distressed price in a key business for Bank of America seems to be a very strong long-term move."
Still, he said, the size of future loan losses and length of the housing slump remained near-term risks.
Bank of America expects a US$1.2 billion restructuring charge from the transaction and said it would need a couple of billion dollars of new capital to help to preserve its capital ratios.
The bank expects by 2011 to realise US$670 million of after-tax cost savings, or 11 per cent of the combined company's mortgage expenses.
It expects the purchase to add 3 per cent to 2009 earnings per share, excluding items.
Lewis, 60, said he wanted to retain a number of senior Countrywide officials who are "very, very good operators".
He also said he would like the 69-year-old Mozilo to stay with Countrywide until the merger closes, after which "I would guess he would want to go have some fun".
Countrywide did not return requests for comment.
In 2007, Countrywide made US$408 billion of mortgages, or roughly one in six US home loans. It also handles billings on some US$1.48 trillion of mortgages in its servicing portfolio.
The company cut lending nearly in half late last year, and stopped making most of the variable-rate and sub-prime mortgages that caused many of its problems, after tight credit markets forced it in August to draw down a US$11.5 billion credit line.
Nevertheless, Countrywide said last week that defaults and late payments in its servicing portfolio reached record levels in December. The company had lost US$1.2 billion in the third quarter.
- REUTERS
