More reason BofA is crazy to take on Countrywide

Of all the merger decisions in the banking industry of late, BofA’s decision to back Countrywide Financial is the most risky. The fallout from Countrywide only gets worse day by day. I am astounded that this deal is on track. BofA Shareholders will regret it.

Bank of America’s Ken Lewis is trying to crack a big nut in taking on Countrywide Financial to its balance sheet. To date, BofA has been fairly successful in limiting its writedowns during this credit crisis, but there are any number of problems attendant with the Countrywide transactions. I thought surely BofA would recognize these risks and back out of the Countrywide deal. But, it looks like full steam ahead. Some of these may cause BofA to be exposed to major financial losses in the future. The latest is a lawsuit by the state of Illinois against Countrywide and its CEO. here are the four major risks I see:

• The ‘Friends of Angelo’ scandal is one of the most potent political scandals to come out of the subprime crisis. As in all major crisis situations, Washington needs scapegoats and I guarantee you, Angelo Mozilo and Countrywide are high on their list.
• Angelo Mozilo dumped lots of stock during the boom. Even last year, he made a fortune in options. The optics here are bad. Regulators will be digging for dirt and looking to see where the dead bodies are buried. Being associated with this is no good for BofA.
• The states are coming after Countrywide too. Illinois has just sued Countrywide and Mozilo. Remember, state revenue is going to sink in the next few years. They need to recoup their losses in some way. Scapegoating Countrywide is a good deal. In fact, its even better now because Bank of America has very deep pockets.
• Countrywide has a lot of bad loans on its books. Let’s remember why Bank of America got into this in the first place. Last August, at the height of the credit panic, rumors were circulating that Countrywide was on the verge of collapse. BofA stepped in with an investment, saving Countrywide from probable bankruptcy. When times got tougher in January, BofA went whole hog and decided to swallow them whole. Expect many more writedowns at Countrywide.

The long and short of it is: BofA is taking on a company that would be in liquidation now if not for Bank of America. BofA have already been put on ratings watch because of the acquisition. Meredith Whitney thinks they will have to cut their dividend soon. This is a bad merger for BofA. They need to back out before it’s too late.

Update: The state of California has since sued Countrywide and the shareholders of Countrywide have approved the merger. See my post on the lawsuits here.