Case Study 4–3. BofA Acquires Countrywide Financial Corporation
On January 12, 2008, Bank of America Corp (BofA) announced plans to buy mortgage
lender Countrywide Financial Corp (Countrywide) for $4 billion, a 70 percent discount
from BofA’s book value. Countrywide originates, purchases, and securitizes residential
and commercial loans; provides loan closing services, such as appraisals and flood
determinations;
and performs other residential real estate–related services. This marked
another major (but risky) acquisition by Bank of America’s chief executive Kenneth
Lewis in recent years. BofA’s long-term intent has been to become the nation’s largest
consumer bank, while achieving double-digit earnings growth. The acquisition would
help the firm realize that vision and create the second largest U.S. bank. In 2003, BofA
paid $48 billion for FleetBoston Financial, which gave it the most branches, customers,
and checking deposits of any U.S. bank. In 2005, BofA became the largest credit card
issuer when it bought MBNA for $35 billion.
The purchase of the troubled mortgage lender averted the threat of a collapse of a
major financial institution because of the U.S. 2007–2008 subprime loan crisis. U.S. regulators
were quick to approve the takeover because of the potentially negative implications
for U.S. capital markets of a major bank failure. Countrywide had lost $1.2
billion in the third quarter of 2007. Countrywide’s exposure to the subprime loan market
