Another day, another multi-billion dollar settlement. Business as usual down in Charlotte, NC, home to Bank of America.
I’ve lost track of all the settlements, but the New York Times has been kind enough to assemble them in a time line. This takes us to this past week, when the mother of them all was announced: $16.65 billion to end investigations by the Department of Justice and various state and local prosecutors, the largest government settlement ever by a private company. According to the NYT, this is in addition to the roughly $50 billion already paid for various mortgage misdeeds. And the bleeding may not be over yet: there are still civil lawsuits outstanding.
Some of the misdeeds were home grown and some of them arose from that other problem child of the financial crisis, Merrill Lynch. But the vast majority of these claims come from the activities of Countrywide Financial, the mortgage broker acquired by Bank of America in January of 2008 for $4 billion. An investment of $4 billion that turned into a legal bill of the better part of $67 billion certainly establishes this as one of the worst deals of all time.
And that is the mystery.
First, how did Bank of America ever make this acquisition? I wasn’t living in the USA at the time, but my friends in the financial services and real estate industries tell me that Countrywide was well known as the go-to lender for the otherwise un-financeable. How is it that Ken Lewis and his colleagues in the Bank of America executive suite were the only ones not to get the memo? Why is it that no senior person at the bank ever asked himself how, in the brutally competitive and notoriously unsavoury business of mortgage broking, Countrywide was able to dominate? Did it never occur to them that they might have been cutting a few corners?
It wasn’t like Bank of America shouldn’t have been on the alert. By the time they made this acquisition, hedge funds managed by Bear Stearns and BNP Paribas, both heavily invested in the sub-prime mortgages that Countrywide loved to originate, had already blown up. A few antennae should have gone up after this.
But it shouldn’t have been even this hard. One good look at the perma-tanned and comically over-dressed CEO and founder of Countrywide, Angelo Mozilo, should have been enough. You wouldn’t buy a used car from this guy, not to mention a used company.
The bad acquisition is only part of the mystery. The bigger question is why Bank of America continues to drop money into this financial toilet. Why don’t they just walk away?
Bank of America bought the shares of a company. Shareholders benefit from “limited liability”, which means, as a general rule, you can’t lose more than the amount of your investment. After that, it becomes the problem of the company’s creditors, including those seeking legal redress. Bank of America doubtlessly compounded the mistake of buying shares by replacing some of the company’s debts with is own loans, particularly during the financial crisis when probably nobody else would lend to Countrywide. But it is hard to believe that they did this to the tune of $67 billion. It still should have been cheaper to walk away from the shares and the loans than incur this death of a thousand legal cuts.
In other words, why hasn’t Bank of America done to the Countrywide claimants the same thing that thousands of mortgagors have done to Countrywide (and Bank of America): mail in the keys? I would have thought that, if Bank of America has learned nothing else from its experience with the dud borrowers of Countrywide, it is how to default with enthusiasm.
I suspect that the answer to both mysteries is the same. Corporate and executive egos, combined with generous helpings of OPM (“other people’s money”), got Bank of America into this mess and the same things keep the bank in it. Meanwhile, the hapless Bank of America shareholders keep writing checks. ‘Twas ever thus.
Roger Barris, London
PS. I realize that it is probably pretty hard to default on the US Government, particularly when you are a highly regulated financial institution. But I couldn’t resist the temptation to tweak Bank of America. Plus I do think that they could have used the default card in a much more clever way than they did in this process. But having spent about 20 months under the Bank of America umbrella after its acquisition of Merrill Lynch, “clever” is not a word that I readily associate with this company.