60 Billion Reasons Bank of America Corp Can't Blame Countrywide Financial for Its Problems

Among analysts and commentators, there's a belief that the lion's share of Bank of America's (NYSE: BAC  ) problems since the financial crisis are not of its own making -- at least insofar as credit losses are concerned, that is. The problems were rather, so the argument goes, inherited via its 2008 acquisition of Countrywide Financial.

"I would argue that Bank of America's downfall was because of poor acquisitions and due diligence rather than poor loan underwriting," a comment on a recent column of mine reads. "Bank of America was held in that class of conservative banks before the crisis, but Merrill Lynch and Countrywide soiled the books that otherwise might have been OK."

I don't mean to be curt, but this line of argument isn't consistent with the facts.

Who's responsible for Bank of America's problems?
To be fair, it does seem to be true that the majority of losses stemming from Bank of America's consumer real estate division do indeed derive from mortgages issued by Countrywide. As I've documented elsewhere, this has cost the nation's second largest bank by assets tens of billions of dollars in legal fines and settlements as well as operational losses.

Although determining exactly how much is a rough science at best, it wouldn't be unreasonable to conclude that the Countrywide acquisition will end up costing Bank of America more than $50 billion. Suffice it to say, that's a lot of money and it certainly seems to support the belief that "Bank of America's downfall was because of poor acquisitions and due diligence [related to its Countrywide] rather than poor loan underwriting."

But here's the thing. While this assumes imprudent acquisitions and poor loan underwriting are mutually exclusive, the reality is that Bank of America is guilty of both. If anything, in fact, poor underwriting has caused at least as much damage to Bank of America and probably more.

Bank of America's credit card debacle
The reason so many analysts and commentators miss this point is because it had nothing to do with mortgages. The culprit instead was Bank of America's credit card division.

In 2008, Bank of America wrote off $20 billion in bad credit card loans. In 2009, the figure jumped to $29.6 billion. And the following year, the bank wrote of another $23.1 billion, split between provisions and an impairment charge to the goodwill of its credit card franchises.

In these three years alone, in other words, Bank of America charged off $60 billion more than its normal $4-billion-a-year run-rate for bad credit card loans.

"In the boom we pushed cards through the branches and in mass mailings," CEO Brian Moynihan told Fortune's Shawn Tully in 2011. "To drive growth we gave cards to people who couldn't afford them."

According to a recent Forbes article by Halah Touryalai, under Moynihan's predecessor, Ken Lewis, "Bank of America became even more product-driven, including the goal of having as many credit card and checking accounts opened as possible."

And it's worth noting that this type of behavior wasn't unique to Lewis' reign.

"One of the problems I had running the bank was that marketing would come up with some idea to sell a product, but we'd never sell enough of it," Lewis' predecessor, Hugh McColl, told Touryalai. "The problem would be we'd have to keep the ... product and support it even though it didn't make any money."

The Foolish takeaway
The takeaway here is that it's wrong to attribute Bank of America's problems to "poor acquisitions and due diligence rather than poor loan underwriting." In truth, the bank's struggles have stemmed from both, in roughly equal proportions.

Along the same line, it's also factually inaccurate to say that Bank of America was "held in that class of conservative banks before the crisis, but Merrill Lynch and Countrywide soiled the books that otherwise might have been OK."

Perhaps at one point this was true. But as best as I can tell, it wasn't at any point over the past three decades.

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Comments from our Foolish Readers

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  • Report this Comment On July 01, 2014, at 12:24 AM, JustTheFacts wrote:

    Delve deeper. The problem with BAC and all other major national and international banks isn't a fault of their own construction or their own actions. They simply did, and have always done, whatever seemed prudent at that moment in time - in order to maximize their short-term profits. Because Wall Street is focused on the next quarter's report of profitability, to the exclusion of long-term sustainability and/or profitability. As are most of the world's governments these days (with China as a possible exception).

    It's a basic fault in our financial system as a whole.

    When I grew up, a high-school-educated blue-collar worker could earn enough to keep a family of four or six or eight living OK (although certainly not in wealth) --- with the wife staying home to raise, oversee, and care for the children full time. Nowadays, it takes two college-educated workers to maintain the same lifestyle for a family of 3 or 4. With the children's rearing and education handed off to total strangers from shortly after their birth.

    Back then, the world's top percent held 75 or 80 percent of the world's wealth, with the rest spread around to the "worker bees". Nowadays, they hold 90 to 95 percent of the world's wealth, and the "worker bees" are necessarily struggling as a result.

    But what those who run the world don't realize is that true wealth isn't infinite. And despite what they may wish, their governments cannot simply print it without limitation.

    True wealth must be produced through hard work, and it's the "worker bees" who produce it. And if they don't soon start sharing their wealth with those who produce it, then production will cease.

    And where we go from there is anyone's guess!

    BAC and other large banks aren't the cause of their own problems, or ours as a world community. They are simply the symptom of a gross and widespread misunderstanding of the basic concept of wealth and how it is produced.

  • Report this Comment On July 01, 2014, at 9:15 AM, mastedon2 wrote:

    Urged by government administrations to "Aid" during the mortgage crisis, BoA purchased CW and ML. Now. they are taken to the stake and burned again , and again, and again, yet no one mentions the govt insistence that they buy these two Enrons that should have dissolved and went BK.

    Fraud has its just rewards, laws should not seek to circumvent them. Historical data regarding credit cards is 3 years old.

  • Report this Comment On July 06, 2014, at 11:21 AM, thewhitestocks wrote:

    mastedon2 is right on - no one mentions that fact - BOA bought CW and ML because the government twisted arms to get them to do that and at that time the full extend for CW's fraud was not known. Fraud by its very nature, makes it difficult to uncover and when BOA was forced to quickly consummate the deal, the discovery of the fraud was not possible. In short they were screwed by the government and have been held responsible. Remember no good deed goes unpunished.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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