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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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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