Subprime Deal: Why is BofA Buying Countrywide?

For months, I’ve been waiting for my bank, Bank of America, to back out of the $4 billion deal to buy Countrywide Financial.  Countrywide is a hot mess:  Its stock price is in the toilet, it’s losing hundreds of millions every quarter; and its reputation has plummeted, thanks to its being the epicenter for risky, subprime lending. Bank of America, on the other hand, has a pretty good reputation, is financially healthy, and did not get caught up in the irresponsible-lending frenzy.

But in this story from The New York Times, BofA is insisting that, despite everything, the deal is still on.

In a conference call on Monday with investors, Kenneth D. Lewis, the chief executive of Bank of America, confirmed his commitment to the Countrywide buyout, which is expected to close by the end of September. When asked about the fact that home prices have plummeted and loan defaults have soared since the deal was announced, Mr. Lewis defended it as “compelling,” with a “pretty nice” upside. “We don’t have our heads in the sand,” he said.

No?

Mr. Lewis’s shareholders have a right to be nervous about the deal, analysts say. As the nation’s largest home lender, Countrywide stands at the center of the mortgage storm and is being buffeted not only by woeful financial results but also by intense scrutiny from state and federal regulators. Bankruptcy judges have become vocal about what they consider dubious tactics taken by Countrywide against troubled borrowers.

And:

Because of the credit risk in Countrywide’s books, Paul J. Miller, managing director at Friedman, Billings, Ramsey, a securities firm, estimates that the deal will cost Bank of America an additional $10 billion to $15 billion above the $4 billion purchase price when a final accounting of losses is made.

“This is a horrible deal,” Mr. Miller said.

Seems that way to me, too.  I’m no analyst, but why would a conservative, high-performing bank take on this time bomb? 

The story sheds little light on BofA’s motivations.  BofA officials say they’re going through with it; Countrywide won’t comment; analysts are freaking out.

I still think the deal won’t go through.  If the deal isn’t due to close until the end of September, that’s still plenty of time for BofA to back out.

Recent Redfin posts:
And Boy Are My Arms Tired
Avril Lavigne Finally Sells Her Mansion
Introducing Our New Glendale/Pasadena Blogger