We didn’t pay much attention to the$2 billion investment by Bank of America in mortgage lender Countrywide at the time because we didn’t like it:
I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well…..I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.
To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.
In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).
Bank of America’s bad karma around this deal has caught up with them, and quickly too. From Bloomberg:
Bank of America Corp.’s $2 billion investment in Countrywide Financial Corp., the biggest U.S. mortgage lender, has lost almost half its paper value as Countrywide fell amid speculation it may file for bankruptcy.Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by market capitalization, made the preferred-stock investment in August to help bail out the lender amid the global credit rout that cut off its access to short-term financing.
Bank of America has the right to convert the preferred stock to common shares at $18 each. If the preferred shares had been swapped for common stock at the mortgage lender’s high of $24.46 on Aug. 23, the first day of trading after the deal was announced, Bank of America would have made a $700 million paper profit. Countrywide also agreed to pay dividends of 7.25 percent on the preferred shares.
Instead, Countrywide’s shares have tumbled, leaving Bank of America’s investment down $858 million, data compiled by Bloomberg show. Countrywide fell 29 cents to $10.28 today in New York Stock Exchange composite trading as the lender denied speculation it will seek protection from its creditors. The shares have lost about 76 percent this year.
Bloomberg didn’t even do the math right. The economic loss is higher than the $858 billion they indicated (that’s the( $18-$10,28/$18) x $2 bilion) . You’d have to have the expected volatility of Countrywide’s stock and what the restrictions on converting the convert preferred into common were to assess the deal. However, selling a deeply in the money convert is very unusual, to put it politely. BofA made its investment on terms which almost certainly mean that the $2 billion was at a discount to the then-fair value of the securities. So since the economic value was greater, the loss would be correspondingly larger.
But it seems no one can do business with Countrywide and come out a winner.
Anonymous 
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Plus, BOFA has the lost opportunity cost. How much could they have made by lending the money to someone else or gaining interest on it?