Countrywide mortgage"It's the worst deal in the history of finance." So said University of North Carolina banking and finance professor Tony Plath recently to The Wall Street Journal, in reference to Bank of America's (BAC) 2008 purchase of Countrywide Financial.

At the time, Bank of America thought the mortgage originator, priced at $2.5 billion, was a bargain, but not anymore. One estimate puts the bank's total cost of acquisition at more than $40 billion, and the fun may not be over yet.

What They Were Thinking

By late 2007, America's real estate market was obviously on the way down, but no one knew it was about to fall off a cliff, or that it would almost take the rest of the planet down with it when it did. According to the Journal, Bank of America's then-CEO Ken Lewis believed that the home-mortgage market was about to hit its low point and wanted to get in on the action while he still could.

Countrywide Financial was co-founded in 1969 by Angelo Mozilo, a take-no-prisoners entrepreneur who was also the company's CEO. By 1999, after 30 years of struggling to make a dent in the mortgage market, Countrywide had 7.3% of market share. By 2004, however, its share had jumped to 13.1%, making it the country's No. 1 mortgage originator.

Unfortunately for soon-to-be-owner Bank of America, much of that growth had been fueled by what turned out to be financial time bombs: subprime loans and adjustable-rate mortgages. Yet in 2007, Mozilo somehow managed to sell Bank of America a $2 billion position in Countrywide, and by July 2008 he had sold Bank of America the entire company.

Mozilo was convicted in 2010 of securities fraud and insider trading by the Securities and Exchange Commission. By the end of 2009, Lewis was gone from Bank of America, replaced by current CEO Brian Moynihan. At the time of the Countrywide purchase, Moynihan was Bank of America's investment banking chief.

We Broke It, You Bought It

"Obviously," Moynihan remarked in 2011, "there aren't many days when I get up and think positively about the Countrywide transaction." According to the Journal, Bank of America has spent most of the estimated $40 billion Countrywide cleanup cost on real-estate-related balance-sheet write-offs, funds set aside for toxic mortgage-backed securities claims, and legal costs relating to the Countrywide purchase.

Bank of America now believes it has gotten a handle on the Countrywide issue, though it acknowledges it's holding out the possibility of another $5 billion in related losses. But is even that number to be believed?

Too Big to Understand

The superbanks, which also include JPMorgan Chase (JPM) and Citigroup (C), have balance sheets so vast and so complex, it's really anyone's guess as to whether the mountain of irresponsible lending in any of these institutions that led directly to the worst financial crisis in generations is even close to being cleared up.

JPMorgan had a $100 billion bet placed in the derivatives market that CEO Jamie Dimon didn't even know about until it started to go unmistakably south. He's still doing damage control on that one. Related losses were initially estimated to be $1 billion, but that quickly changed to $2 billion. Now, loss estimates range as high as $9 billion.

If Jamie Dimon, almost universally recognized as one of the best bank CEOs and risk managers in the business, can be so stupendously wrong when it comes to what's going on in his own bank, what about Brian Moynihan, then?

Gillian Tett, who writes on the banking sector for the Financial Times, and who authored one of the defining books on the financial crisis, Fool's Gold, recently wrote a column addressing bank size and complexity in relation to the botched JPMorgan trade. But it also applies nicely to Bank of America's current situation: "If you want a reason to break up the banks, you do not need to worry just about 'too big to fail'; the real danger today is that financial institutions and markets are becoming 'too big to understand.'"

That's how the worst deal in the history of finance could get even worse.



John Grgurich is a regular contributor to The Motley Fool, and holds no positions in any of the companies mentioned in this column. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Citigroup.

Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Finding Stock Ideas

Learn to do your research and find investments.

View Course »

Add a Comment

*0 / 3000 Character Maximum

35 Comments

Filter by:
w_diago

The post will help me find out the best reverse mortgage lenders according to my own case in NC. In general, the mortgages may benefit senior homeowners with little income and significant equity in their home. So, it is a good financing solution for senior homeowners over 62.


http://www.reversemortgagelendersdirect.com/questions-answered/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-loan/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-rates/
http://www.reversemortgagelendersdirect.com/california-reverse-mortgage/
http://www.reversemortgagelendersdirect.com/reverse-mortgage-calculator/
http://www.reversemortgagelendersdirect.com/reverse-mortgages-how-they-work/
http://www.reversemortgagelendersdirect.com/is-a-reverse-mortgage-a-good-idea/

July 16 2013 at 8:23 AM Report abuse rate up rate down Reply
kafienkarl

Read Matt Tiabbi's article in Rolling Stone: Wall Street's Bid-Rigging Scandal. You think government is at fault for everything that's what they want you to think while they rob everyone. Now banks won't loan hurting business and prolonging the housing mess. So people don't spend. And you want Obama to wave a magic wand because the GOP said he walks on water get real. Romney won't change anything actually its his kind that are part of the problem.

July 06 2012 at 8:50 AM Report abuse rate up rate down Reply
kafienkarl

The wealthy and financial elite are winning and laughing at people picking sides on who to blame. The banks capitaize the winnings but socialize the losses.

July 06 2012 at 8:40 AM Report abuse +1 rate up rate down Reply
kafienkarl

And some people think the financial crisis from late 2008 is over........far from it. This corrupt derivative market has effected countries and governments all over the world. Putting debt on everybody. Remember Cheney said deficits don't matter well they do now.

July 06 2012 at 8:39 AM Report abuse +1 rate up rate down Reply
kafienkarl

This country is run by "too big to fail" and "too big to understand" world financial institutions. People better wake up the 1% are taking this coutry over. They have bought our courts and the politicians all of them democrats and republicans...........croony capitalism. The income gap is becoming wider to where its going to be a problem. As long as people pick sides the 1% is winning. They love that. Its a joke to them. People actually think their side is innocent. Corporations are people and citizens united this will further destroy the middle-class all for the global economy.

July 06 2012 at 8:35 AM Report abuse +1 rate up rate down Reply
bvg942

Why do I think that Mr. Lewis said that Washington told him that if he wanted bailout money from TARP he would
need to take Counrtywide & Merrill. I don't know how true this was,but after reading the names of politicians,both Demecrat & Republican who got special loan rates from Counrtywide I wouldn't have any doubt that this was there way for payback for mortgages that were way under the going rate of interest.

July 06 2012 at 8:29 AM Report abuse rate up rate down Reply
kafienkarl

People talk about "freddy and fannie" which has nothing to do with the derivative market that took the financial market an this country down to a "depression" or what some call the "great recession" a softer version. Banks were over leveraged and the mortgage meltdown was a scam. Wall Street and mortgage companies wanted to give anyone a mortgage that had a heart beat. Goldman Sachs and the like knew there were bad loans made they didn't care. They bet against their own clients. The system is rigged with high frequency trading, naked short selling, CDOs and derivatives the shadow market. And people try to put all the blame on the government and Obama that's ridiculous. They don't understand so they take the path of least resistance and blame the guy that inherited the mess. Look the other countries of the world that bought these investments from Wall Street and London same thing debt and recession. This is a global recession not just the the U.S.

July 06 2012 at 8:24 AM Report abuse +1 rate up rate down Reply
allyndp

Ther'es one stand out falsehood in this story. "no one knew" There were those that knew of the impending bust but they were just not the people who had any influence or in positions to have anyone listen to them. They were people down on main street where every day people saw it coming but those on wall street were more interested in lining thier pockets and getting out of Dodge before it happens. Many people knew that mortgage brokers were getting under the table kick backs for getting buyers to sign for a mortgage higher interest than they qualified for and they knew that the housing construction industry were building homes and selling them and 400 percent profit. They knew that realters were convincing people that they needed 6-1000 more square footage in houses than they actually needed or could afford.

July 06 2012 at 8:08 AM Report abuse rate up rate down Reply
royman103

Why cant anyone write a story and just get to the point and make it clear for all to understand? It almost reminds me of another stack of papers I clearly didnt understand lol

July 06 2012 at 3:36 AM Report abuse +1 rate up rate down Reply
Doug Click

This is crap. The loans were insured by freddy and fanny and they get every penny and they get to sell the asset. This is some kind of game that the banks play to hide huge profits supported by the tax payers. BA stole Country Wide.

July 05 2012 at 5:01 PM Report abuse rate up rate down Reply