The Wall Street Journal-20080111-Bank of America Bets on a Recovery- Interest in Countrywide Sends Hopeful Signal- But How Ill Is Lender-
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Bank of America Bets on a Recovery; Interest in Countrywide Sends Hopeful Signal, But How Ill Is Lender?
Kenneth Lewis's move to buy hobbled mortgage lender Countrywide Financial Corp., risky to be sure, is a bullish bet on Bank of America Corp.'s own future and that of the battered financial system.
The chief executive's action may banish, at least momentarily, worries about Bank of America's balance-sheet strength, separating it from many beleaguered peers. While Bank of America was never thought to be in as dire financial straits as Citigroup Inc., investors have feared that any big financial institution could be forced by big mortgage-linked losses to raise capital by either seeking outside investment or cutting dividend payouts.
Those fears have dragged down Bank of America's stock along with the wider financial sector. Earlier this week, Bank of America's shares fell to new 52-week lows and plumbed levels unseen since the first half of 2004.
But investors on the New York Stock Exchange took heart in the Countrywide news, pushing up Bank of America's stock 56 cents, or 1.5%, to close at $39.30 yesterday. The possible deal was seen as positive for the wider financial industry and gave a lift to beaten- down financial stocks such as Washington Mutual, which rose nearly 15%, and mortgage insurer MBIA, which was up 5.3%.
Mr. Lewis's action also could be seen as a signal that Bank of America, due to report fourth-quarter results Jan. 22, isn't likely to shock markets with bigger-than-expected write-downs of securities linked to shoddy mortgages. Analysts have expected that Bank of America likely will write down the value of such securities by between $4 billion and $6 billion but hadn't ruled out an even bigger hit.
To be sure, a Countrywide deal, if completed, may prove too much of a reach for the acquisitive Mr. Lewis, who in August plunked down $2 billion to essentially purchase Countrywide stock at $18. The shares have recently traded below $5. That shows Mr. Lewis has at least once before misjudged Countrywide.
In early trading yesterday, before news of a possible Bank of America acquisition broke, Countrywide was trading at just 20% of its book value, as measured by the company Sept. 30. It isn't clear at what price a deal might take place, but at anything near current levels, Bank of America would be buying the company at a big discount to its net worth.
A deal's success depends on how sick Countrywide actually is. Some investors felt the lender was struggling mainly from a lack of money caused by severe credit-markets jitters. But others say Countrywide had far more than funding problems and faced operating losses and large losses from write-downs plus lawsuits and regulatory scrutiny.
In the third quarter, Countrywide took $2.7 billion in credit- related write-downs and losses. Fears were mounting that the company's inability to fund new loans, along with fresh hits to its capital position from additional losses, might prompt it to seek bankruptcy- court protection. Countrywide publicly denied that any such move was in the offing.
Investors had mixed feelings about a deal and the implications for Bank of America.
"My first, gut reaction is that it's negative," said Daniel Genter, president and chief investment officer of RNC Genter, a Los Angeles money manager that owns Bank of America stock. "It's very difficult to see how that's going to be accretive to earnings and depending on what you pick up on the liabilities, it's hard to see a good outcome."
The flip side, Mr. Genter said, is that it shows Mr. Lewis "believes that they have a lot of strength," and markets may see this as a "vote of confidence as to what their financial position really is."
Bank of America has "a vested interest in protecting their investment, and certainly there's a vested interest in protecting the No. 1 mortgage originator and servicer from going out of business," said Todd Hagerman, a bank analyst at Credit Suisse. "That isn't only in Bank of America's interest, but also in the interest of the U.S. economy and the interest of the U.S. homeowner and consumer."
Yet Mr. Lewis also is "making a bet on the long-term recovery in the housing market and his own long-term financial position," Mr. Hagerman added.
The implications of such a deal to Bank of America's own capital position are vital because the mortgage crisis and ensuing credit crunch have cast a cloud over the balance sheets of financial institutions generally. Bank of America's expected fourth-quarter write-downs, along with the completion of the acquisition of LaSalle Bank Corp. in October, are likely to pull down its Tier 1 ratio, an important measure of a bank's financial strength, although it isn't clear by how much.
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Dana Cimilluca contributed to this article.
(See related article: "Thursday's Markets: Blue Chips Jump 117.78 To 12853.09 as Deal, Fed Hints Lift Stocks" -- WSJ January 11, 2008)
