The Wall Street Journal reported Thursday that Bank of America is in "advanced talks" to purchase the nation's largest lender, Countrywide Financial Corporation. The Journal cited two unnamed sources, and both BofA and Countrywide did not have comments on the report. Bank of America invested $2 billion in the troubled lender in August 2007, a purchase which conferred BofA first right of refusal in any sale of Countrywide -- a clause that had many pegging a Countrywide/BofA merger. Bank of America recently completed a $21 billion acquisition of LaSalle Bank in September, however, which could pose a regulatory hurdle in any Countrywide acquisition. From the Journal:
When the Federal Reserve approved Bank of America's acquisition of LaSalle in September, the combined bank grew to hold 9.88% of the country's deposits. Federal law prohibits a bank holding company from controlling more than 10% of U.S. deposits after acquiring another bank. But the law includes a caveat: The 10% limit doesn't apply to federally chartered thrifts, meaning a bank-holding company may control more than 10% of deposits in the U.S. following a thrift acquisition. Since a Countrywide subsidiary called Countrywide Bank is a federally insured thrift, that may give Bank of America room to maneuver around the deposit cap.
Is it possible that Countrywide's move to adopt a thrift charter and move its business under the umbrella of Countrywide Bank -- as it has been doing since the latter part of last year -- was orchestrated to allow just such a deal? Perhaps. Much more likely, however, the catalyst behind acquisition talks is the fact that Countrywide's stock price has tanked in the past few days on rumors of a possible ratings downgrade and/or bankruptcy filing. Continued turmoil in the mortgage industry, combined with swiftly increasing defaults and a frozen secondary market for many of the loans it holds, have dogged Countrywide ever since BofA took the plunge and invested -- which may make any acquisition a sort of shotgun-style wedding. After all, I doubt BofA's investors would be very pleased to see the bank sit idly by while its $2 billion stake in the nation's largest lender evaporates, even if absorbing Countrywide will cause some modicum of pain for a bank that had so carefully avoided getting caught up in the subprime hype to begin with. If anything, that's the real undercurrent of irony at play here. Bank of America has the deep pockets it will take to ride out the current market storm, but it also took some pretty painful steps in the past to avoid the subprime/exotic mortgage bonanza when it was hot -- costing it market share at the time. For all of its maneuvering, BofA now finds itself at the altar with the company that, along with now-defunct New Century and Ameriquest, essentially helped define the subprime lending boom. Which could mean that BofA will have managed to avoid the profits of the subprime lending boom, while nonetheless being forced to pick up at least some the tab. How's that for ironic? Disclosure: When this post was published, the author held no positions in CFC or BAC.