Looking Back On Bank Of America's Countrywide Debacle

Five years ago Friday, Bank of America announced it was buying one of the nation's largest mortgage lenders. Bank officials thought the deal to buy Countrywide Financial would cement Band of America's place at the top of the commercial banking business. But it did not turn out that way.

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Five years ago today, Bank of America announced it was buying the troubled subprime mortgage lender Countrywide Financial for $40 billion. At the time, the financial crisis had not fully revealed itself, and many people thought Bank of America was getting a good deal. Instead, the acquisition has turned into a never-ending legal and financial nightmare. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: It's not hard to find people who will tell you that Bank of America's decision to acquire Countrywide Financial in January 2008 was quite simply the worst deal in the history of the financial services industry.

TONY PLATH: Oh, yeah. I mean, you know, they lost 40 billion, and they're still counting.

ZARROLI: Tony Plath is an associate professor of finance at the University of North Carolina in Charlotte.

PLATH: At the time, the strategy made sense. The price made sense. The problem was it was exactly the wrong acquisition at precisely the wrong time.

ZARROLI: When the deal took place, Bank of America, under its CEO Ken Lewis, was growing fast, mostly through acquisitions. And it was eager to expand its mortgage business. Founded by Angelo Mozilo, California-based Countrywide had exploded in growth by offering subprime mortgages to people with credit problems.

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UNIDENTIFIED MAN: Homeowners: Want to get cash and simplify your bills? Ask about a combo loan from Countrywide.

ZARROLI: At the time of the deal, the housing market was already collapsing, and Countrywide was losing money, so it could be bought for a lot less than it would have cost a year earlier. Bank of America plunged ahead with a deal. Jon Finger runs and investment firm that owns almost a million shares of Bank of America stock.

JON FINGER: Ken Lewis and his board of directors were focused on building the size of the company rather than focusing on shareholder returns, and the result was disastrous.

ZARROLI: Finger says even before the deal was finalized, several states had sued Countrywide for mortgage abuses.

FINGER: At that point, Bank of America should have stepped back and either renegotiated the deal or cancelled the deal.

ZARROLI: But it did neither. Once the acquisition went through, Bank of America began pouring over Countrywide's books, and it was in for a rude shock. It turned out that the problems were much worse than anyone had suspected. Many of Countrywide's loans had gone to people who couldn't afford them, and with the housing market in turmoil, a flood of foreclosures was coming its way. Again, Tony Plath.

PLATH: That's when Bank of America recognized that they had purchased a mess.

ZARROLI: By 2009, Bank of America's stock price had fallen by 90 percent. The Countrywide debacle was one of the big reasons why Ken Lewis was forced out of office - that and the controversial acquisition of Merrell Lynch. Bank of America is legally liable for abuses committed by Countrywide, and it's been forced to spend $40 billion settling legal claims against it.

Jon Finger says the legal troubles have badly hurt Bank of America's brand.

FINGER: They are absolutely tarred with the same brush, even though they did not actually commit those acts themselves, but they've, you know, they've acquired that legacy of Countrywide's bad practices.

ZARROLI: This week, Bank of America agreed to pay more than $10 billion to settle claims filed by the mortgage company Fannie Mae, which had purchased a lot Countrywide's loans. The bank still faces numerous private lawsuits and regulatory investigations. All of this remains a tremendous distraction for Bank of America's management. Perhaps not surprisingly, the company that wanted to expand its mortgage business is now reducing it, says banking consultant Bert Ely(ph).

BERT ELY: It's - I think somewhat of an open question right now is to how significant Bank of America is going to be as a mortgage lender, say, five years from now.

ZARROLI: Today, Countrywide has come to symbolize some of the worst excesses of the housing boom, but it is the company that bought it five years ago, Bank of America, that is having to clean up much of the mess it left behind. Jim Zarroli, NPR News, New York.

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Another bank is facing fines for activities during the financial crisis. The Royal Bank of Scotland is expected to pay several hundred million dollars for the LIBOR scandal.

INSKEEP: LIBOR is the name for the average rate at which banks lend money to each other. That interest rate is also seen as a signal of bank's health.

MONTAGNE: And the Royal Bank of Scotland, among others, is accused of manipulating the rate to make banks seem safer than they were.

INSKEEP: Now the BBC reports the Royal Bank of Scotland is negotiation with American and British regulators over the size of the fine it will pay. Barclays and the Swiss bank UBS have already accepted huge fines. You're listening to MORNING EDITION from NPR News.

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