CHARLOTTE, N.C. - In a career defined by blockbuster deals, Bank of America chief executive Ken Lewis has taken his biggest gamble yet with an attempt to rescue the country's biggest mortgage lender, Countrywide Financial.
Lewis may have become a market savior by buying the troubled Countrywide for about $4 billion in stock, and keeping the industry and regulators from the messy task of cleaning up the bankruptcy of a company that is servicing 9 million U.S. home loans worth $1.5 trillion.
But Bank of America must first take on billions in mortgages at a time when the nation is facing an ever-widening credit crisis, foreclosures are on the rise and the odds of a recession seems to grow each day.
The prize for Lewis' gamble, however, is a 'state of the art' mortgage origination and backoffice business on the cheap. It was unclear if there would be any changes that would affect borrowers, but Lewis said Bank of America would analyze how the deal would affect both brands.
'I am of the opinion that this is not what Bank of America wanted to do right now, but I think that their hand was forced with Countrywide teetering,' said Gary Townsend, president of Hill-Townsend Capital, a newly launched Maryland-based private investment group.
Shares in the Calabasas, Calif.-based company have traded for as much as $45 in the past year, but plummeted after a widespread spike in mortgage defaults and foreclosures, especially in subprime loans - those made to borrowers with weak credit.
Countrywide shares plummeted 18.3 percent, or $1.42, to $6.33 Friday, giving back some of their 51.4 percent rise on Thursday when reports of a likely deal emerged.
As of the close of trade Friday, the deal represented a premium of 10.8 percent to Countrywide's shares.
Bank of America shares fell 80 cents to $38.50.
Shareholders of Countrywide will receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. The deal is expected to close in the third quarter and to be neutral to Bank of America earnings per share in 2008 and lift earnings per share in 2009, excluding buyout and restructuring costs.
Bank of America expects $670 million in after-tax cost savings in the transaction, or 11 percent of the expense base of the two companies' mortgage operations.
The agreement has been approved by both companies' boards and is subject to regulatory and Countrywide's shareholders approval.
Bank of America already has infused $2 billion in cash in Countrywide - money that Lewis contributed in August, during the height of the summer's global credit crisis.
Since, Countrywide shares have fallen 71 percent. That purchase of preferred stock was convertible into a common shares of Countrywide at $18 per share, for roughly a 16 percent stake in the company.
But Sean Egan, managing director of independent ratings firm Egan-Jones Ratings in Philadelphia, said it's not likely that housing prices will continue to decline 5 percent annually for years into the future. While Countrywide might not have been able to survive the current crisis, that's not a concern for Bank of America, the nation's largest bank by market capitalization and the holder of $1.5 trillion in assets. The bank became the nation's top credit card company after Lewis bought MBNA in 2006.
'It's a shrewd move. Bank of America will own a key player in the mortgage sector - at a fire sale price,' Egan said. 'Ken Lewis is going to make money on it.'
As late as last month, Lewis downplayed the prospect that Countrywide's problems and its crashing stock price would force him to 'to eat about seven years of my words' and make a deal for the mortgage lender, calling it a 'passive investment.'