A Chat with BofA's Ken Lewis

Bank of America's CEO tells Maria Bartiromo why the bank's acquisition of troubled Countrywide Financial is a good deal

by Maria Bartiromo

A little more than a year ago, Countrywide Financial (CFC) CEO Angelo Mozilo protested that the massive mortgage company should not be lumped in with other lenders hammered by subprime fears. That was March, 2007, and its stock was falling. By the beginning of 2008, Countrywide shares were down more than 83%, to about 5, because of extensive exposure to shaky mortgages.

Now, Bank of America (BAC), which bought a 16% stake last summer for $2 billion, has announced it will acquire the rest of Countrywide for ­$4 billion. Since its housing-boom peak, Countrywide has lost $24.57 billion in market value, and there has even been talk of bankruptcy. So why would BofA CEO Ken Lewis, who announced on Jan. 15 that the bank would scale back its investment banking business "for a simpler world," buy such a troubled business? I asked him.

Why did you acquire Countrywide now? Some people think things will only get worse for Countrywide and the industry in general.

Lewis: We're under no illusion that things have bottomed out. But you can never pick the exact time to do something. Nine or 12 months ago, we'd be paying probably $26 a share. And so we tried to weigh the risk and rewards of a further downturn, further deterioration in credit, the legal issues, and come up with a price that made sense based on all the negatives out there. So we did extensive due diligence, probably twice as long as we've ever done on a deal.

There's speculation that Washington did not want Countrywide to fail. Did the government encourage you to acquire Countrywide?

Lewis: Absolutely not. I can tell you they were pleasantly surprised, but there was no prior encouragement.

Did you need to rescue Countrywide to protect that $2 billion investment?

Lewis: No. We always thought that even in dire circumstances, the $2 billion would be good because it is preferred, not common, stock. This was just looking at the fact we were number one in virtually every other consumer product, particularly deposits and credit cards, and this was the last important product we didn't have a number one share in. It just makes strategic sense.

But are you buying too early? It seems like we're in the third inning of a very tough game. What inning would you say we're in?

Lewis: I would say sixth or seventh, not the third. And if I'm wrong, then there's more pain than I originally thought. But it doesn't mean [Countrywide] can't still be a good deal.

Some question whether this deal will actually close. Is there still a chance Countrywide could go bankrupt?

Lewis: We don't anticipate that, and frankly, we did not anticipate that prior to the deal. We've looked very carefully at their funding plan and were pretty impressed that [Mozilo] had lined up his bank borrowings and had unused capacity.

Look five years out, and give me the biggest opportunity from owning Countrywide.

Lewis: If you look at our projections, in the third full year [of ownership], 2011, we think it should be making $2 billion aftertax when you include our cost savings—and that's without a refi boom. So financially, if we're right over time, it will be very compelling. Second, we think owning the mortgage space, or having such a high market share—25% on the origination side—will give us opportunities to sell into that customer base, which would be icing on the cake because we don't have that in the projections.