A little more than a year ago, Countrywide Financial (CFC) CEO Angelo Mozilo protested that the massive mortgage company should not be lumped in with other lenders hammered by subprime fears. That was March, 2007, and its stock was falling. By the beginning of 2008, Countrywide shares were down more than 83%, to about 5, because of extensive exposure to shaky mortgages.
Now, Bank of America (BAC), which bought a 16% stake last summer for $2 billion, has announced it will acquire the rest of Countrywide for $4 billion. Since its housing-boom peak, Countrywide has lost $24.57 billion in market value, and there has even been talk of bankruptcy. So why would BofA CEO Ken Lewis, who announced on Jan. 15 that the bank would scale back its investment banking business "for a simpler world," buy such a troubled business? I asked him.
Why did you acquire Countrywide now? Some people think things will only get worse for Countrywide and the industry in general.
Lewis: We're under no illusion that things have bottomed out. But you can never pick the exact time to do something. Nine or 12 months ago, we'd be paying probably $26 a share. And so we tried to weigh the risk and rewards of a further downturn, further deterioration in credit, the legal issues, and come up with a price that made sense based on all the negatives out there. So we did extensive due diligence, probably twice as long as we've ever done on a deal.
There's speculation that Washington did not want Countrywide to fail. Did the government encourage you to acquire Countrywide?
Lewis: Absolutely not. I can tell you they were pleasantly surprised, but there was no prior encouragement.
Did you need to rescue Countrywide to protect that $2 billion investment?
Lewis: No. We always thought that even in dire circumstances, the $2 billion would be good because it is preferred, not common, stock. This was just looking at the fact we were number one in virtually every other consumer product, particularly deposits and credit cards, and this was the last important product we didn't have a number one share in. It just makes strategic sense.
But are you buying too early? It seems like we're in the third inning of a very tough game. What inning would you say we're in?
Lewis: I would say sixth or seventh, not the third. And if I'm wrong, then there's more pain than I originally thought. But it doesn't mean [Countrywide] can't still be a good deal.
Some question whether this deal will actually close. Is there still a chance Countrywide could go bankrupt?
Lewis: We don't anticipate that, and frankly, we did not anticipate that prior to the deal. We've looked very carefully at their funding plan and were pretty impressed that [Mozilo] had lined up his bank borrowings and had unused capacity.
Look five years out, and give me the biggest opportunity from owning Countrywide.
Lewis: If you look at our projections, in the third full year [of ownership], 2011, we think it should be making $2 billion aftertax when you include our cost savings—and that's without a refi boom. So financially, if we're right over time, it will be very compelling. Second, we think owning the mortgage space, or having such a high market share—25% on the origination side—will give us opportunities to sell into that customer base, which would be icing on the cake because we don't have that in the projections.
Do you think we'll see a recession?
Lewis: I wouldn't have said this three months ago, but I think there's a 50-50 chance of a recession. We're close enough that any kind of shock could send us into recession.
When you were named CEO, one of the first things you did was get Bank of America out of the subprime business it had been dabbling in. In hindsight, this looks like a genius move. What did you see that made you get out, and what are you seeing now that is leading you back in?
Lewis: First, we had a subsidiary called EquiCredit that used brokers to generate subprime borrowings. And so we not only didn't like the subprime business, but we didn't like the broker model as well because, as I've said, I think broker subprime is toxic waste. But we're not getting into the subprime business…because we'll be getting rid of it. There would be no subprime when we buy Countrywide.
This is a bittersweet story for Angelo Mozilo, a guy who came from nothing, built the company up, and now sells it in a period of distress.
Lewis: I know there have been criticisms of Angelo, but beneath the surface, there is a wonderful human being. I think he's gotten a bad rap at times.
He won't be staying with the company, correct?
Lewis: Right. He's 69 years old. He would like to see this through and spend more time with his grandchildren.
Will you see more lawsuits as a result of what has gone on at Countrywide?
Lewis: No question. That was part of the pain I was talking about. In the due diligence, we covered that very extensively and think we've gotten our hands around it.
BofA has had a phenomenal history of weaving together acquisitions. What's the plan for organic growth now, and will you be able to make cross-selling work?
Lewis: I know there's skepticism around cross-selling at times, but look at the success we've had in cross-selling credit cards at our banking centers. Nobody has ever done that before. If the Countrywide brand has not been tainted, we do know that most Americans think of Countrywide when they think of mortgages. And so we may have Countrywide mortgage bankers there in our branches—and then have them, once they make the loan, hand that off to a consumer banker.
What do you think about all this foreign money buying into U.S. financial services institutions?
Lewis: It would be hard for us to see anything wrong with that since we own 24.9% of a bank in Mexico, 8% of a bank in Brazil, and 8% of a bank in China.
Have you had any talks with foreign governments about taking a stake in BofA?
Lewis: No, we have not.