The Great Undoing of Bank of America

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Bank of America  (NYSE: BAC  ) has been near-mortally wounded. But that may be good news.

B of A's evisceration came by its own hand. An unintentional seppuku attempt, if you will. You may have heard a bit about this already, but this all went down in January 2008, when the bank agreed to buy a little mortgage outfit known as Countrywide Financial. 

Believe it or not, at the time, there was optimism around the deal. One asset manager at the time was quoted as saying, "Buying Countrywide was a gutty move ... The whole concern about housing and the economy has been greatly exaggerated." Bank analyst Dick Bove was on the same page, claiming that an ugly quarterly report around the time of the deal was a "clean-up" quarter for Countrywide, continuing, "Bank of America is asking them to look into every place they can find to take losses, so when they become Bank of America, we don't see similar impacts."

But it wasn't to be. The "whole concern about housing and the economy" wasn't, in fact, overblown, and the decision to buy Countrywide was an abysmal one.

Of course, I'm far from the first to say that Countrywide was essentially a bought-and-paid-for cancer for Bank of America. This has been said to such an extent that some investors may wonder if Countrywide is simply the scapegoat for an overall ailing bank. But, rest assured, that's not the case -- the Countrywide acquisition was every bit as bad as billed.

If you actually dig through B of A's annual report, you can find a helpful little table that shows the performance of the loan originations that were sold to the GSEs -- primarily Fannie Mae  (NASDAQOTH: FNMA  ) and Freddie Mac -- between 2004 and 2008. What's even more helpful is that the table breaks out the Countrywide originations versus the "other" originations -- principally, legacy Bank of America production.

As shown above, the numbers are pretty stark. On a percentage basis, 8.1% of "other" originations during that period have defaulted or are severely delinquent. It's 13.1% among the Countrywide originations. But the sheer size of the origination machine at Countrywide makes this gap even worse, because the total GSE originations from Countrywide during that period was nearly $850 billion versus just $272 billion at legacy Bank of America.

The felt impact of this at Bank of America was repurchase claims, lawsuits, multi-billion dollar settlements, and the like. Maybe, even more painfully, it was the growing perception that Bank of America itself was, and is, a terrible lender.

It's with that latter point that there's some silver lining in this sad story. The Countrywide acquisition highlights just how disastrous the wrong deal can be for a company. There's a solid argument to be made that the B of A-Countrywide tie-up was one of the worst in corporate history. But the recognition of the fact that a good deal of B of A's post-crisis troubles have been driven by the Countrywide cancer should give investors some hope that, as that mess continues to get cleaned up, there's a good, solid bank hiding out in there somewhere.

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Read/Post Comments (8) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On May 24, 2013, at 4:28 AM, DavidLeland wrote:

    The Nationwide deal, and undoing, was just a clear indicator of the "gentlemen's agreement" that brought down America. All the property guys want to do - ever - is get rich. All the bankers want to do - ever- is get rich. They all know that there is never going to be enough real money for them all to get rich at the same time, so they 'create wealth' by inflating the cost of housing and thereby increasing the loan amounts and attendant interest. They know that WE THE PEOPLE cannot afford the big and fast increases, but they can get some of the front money by approving loans at ever-increasing multiples over earnings. That is precisely why there was no panic on the parts of the bankers and financial types - this was THE PLAN all along. Thank you Wall Street. Oh, and did you wonder which political party that was?

  • Report this Comment On May 24, 2013, at 6:21 AM, nodummy wrote:

    You can't blame it all on bad investments. Their reputation has been tanking for years. The employees are treated like indentured servants and customers are treated like annoying bugs. The only customers who were truly appreciated were the very rich.

  • Report this Comment On May 24, 2013, at 7:16 AM, sandalchair wrote:

    BOA once hit me with 5 overdraft fees of $35 in a single day! Thieves!!.. It was a check to check time in my life.. it messed me up so bad and caused lots of grief in my family.. Their online banking was so misleading by not always showing all current transactions - even as a pending transaction like Chase does. The online status rarely seemed to match the statuses at the ATM`s. Good riddance to the evil empire of Bank of America.

  • Report this Comment On May 24, 2013, at 8:43 AM, mastedon2 wrote:

    So many of Countrywide's bad loans ended up being BofA's liability in terms of lawsuits. Why were none of the heads at CW brought up on charges? Did Clinton truly sign an act forcing banks to lend to unqualified people and relax criteria? Wasnt this actually Barney Frank's idea to provide housing for more low income people, you know being the "kind hearted" guy he is, having nothing to gain whatsoever by it....tsk tsk...

    The govt fked this one up, and passed the buck to the bankers it forced by law to accept extremely risky loan applicants.. Whoever decided to package them up and sell them as an instrument should reap the rewards of its poor ideal.

    Business corrects itself, If allowed, and it fks something up good, it will pay and could face bankruptcy as it should.

    This article appeared to have "new" and "relevant" news to it going by the basher headline, but we find in the first paragraph, that it is a rehash of the last five years... yawn.. for substance.

    I enjoyed buying several thousand shares at $6.

  • Report this Comment On May 24, 2013, at 10:20 AM, leohaas wrote:

    Sure, buying Countrywide was a bad deal. I agree 100%.

    But this analysis is useless. Why focus on loans that have been sold to the GSEs? These are no longer on BAC's balance sheet. Or do you expect law suits that will take the company down?

    Disclosure: long BAC and FNM at the time of writing.

  • Report this Comment On May 24, 2013, at 10:55 AM, TMFKopp wrote:


    The point is that when investors think about BAC big picture / long term, they have to wonder whether the experience over the last few years means that there is poison running through the veins of the entire organization itself. That is, that this is simply a bad bank, period.

    I think the disparity between the performance of the BAC and C-wide GSE sales shows that much of the trouble that BAC experienced was due to that acquisition, not the core BAC operations. That, I believe, is a very hopeful sign for investors because it suggests that when the C-wide mess gets cleaned up, the good bank that existed previously can shine through.


  • Report this Comment On May 29, 2013, at 8:42 PM, neelvk wrote:

    I have been a "premier" customer at BofA since Feb 1999 and they have treated me with contempt the entire time. I am trying to change all my autopays and direct deposits so that I can finally close the account.

  • Report this Comment On May 30, 2013, at 12:10 PM, hookerslice wrote:

    Dear Motley Fool,

    Please do not publish any more of Mr. Koppenheffer's writing until he learns to define an acronym before he uses it in the text. What the heck is a GSE? I could only guess: :Goverment Secured ???

    I realize that an erudite scholar such as Mr. Koppenheffer does not write, nor does the Motley Fool publish, articles for the unwashed majority such as myself; however, I would point out that if the reader is not provided a definition of terms, then reading the article is surely a complete waste of time.

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