Wednesday June 4, 1:26 am ET
By Ieva M. Augstums, AP Business Writer
Wachovia's Golden West mistake focuses attention on Bank of America's deal for Countrywide
CHARLOTTE, N.C. (AP) -- It's the most basic rule of investing: Buy low, sell high. Former Wachovia Corp. chief executive Ken Thompson couldn't escape his disastrous decision to buy Golden West Financial Corp. for roughly $25 billion at the height of the nation's housing boom. He was pushed out Monday, the same day crosstown rival Ken Lewis was busy defending his deal at Bank of America Corp. to buy Countrywide Financial Corp.
The critical difference: Lewis is paying just $4 billion for his mortgage lending giant.
"I think Lewis might be more imperiled, actually, if he doesn't go ahead and complete the transaction," said Gary Townsend, president of Maryland-based private investment group Hill-Townsend Capital. "The deal has the same perils that Golden West had, except he's not buying Countrywide for nearly the premium that Wachovia bought Golden West at the top of the markets."
The price difference is a little less than $20 billion, if you take into account Bank of America's initial $2 billion investment last summer that helped stabilize the shaky balance sheet of the Calabasas, Calif.-based company. When completed later this year, the transaction will make Charlotte-based Bank of America -- the country's second largest bank by assets -- the nation's biggest mortgage lender.
"Nothing has happened that is out of the boundaries of what we contemplated when we did the deal," Lewis told investors in a conference call Monday.
Nothing could be further from the truth at Wachovia. As the nation's housing market began to stumble, Wachovia's executives continued to defend the purchase and began to incorporate Golden West's business practices into its own. Thompson only later acknowledged the timing of the deal was poor and he was forced to set aside billions of dollars to cover losses from problem loans.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, it said it would revise the underwriting policies in its mortgage loan business -- a step that could make it harder to take out a home loan at the bank.
At Bank of America, Lewis plans to keep one of his own executives in charge of consumer real estate once the deal for Countrywide is completed next month.
"What Ken Lewis did was look down the street at Ken Thompson and said: 'We ain't going there. We're not going to turn Bank of America into Countrywide. We're going to turn Countrywide into Bank of America,'" said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "They're learning on North Tryon from what's going on down on South Tryon."
Wachovia ousted Thompson less than a month after the bank stripped him of his chairman title. The bank called it a "a step that was taken after very careful consideration" and one that was precipitated by no single event but rather a "series of previously disclosed setbacks."
Investors have pushed Wachovia's stock down almost 60 percent in the past year and it closed Tuesday at $21.92. Shares in Bank of America aren't doing much better. The bank's stock is down more than 37 percent in the past year, and traded at a new 52-week low Tuesday before closing at $33.31.
"Ken Lewis is vulnerable from a standpoint of watching his share price crater to the extent it has," Townsend said.
And there are concerns the ongoing struggles in the housing market and Countrywide's distressed loan portfolio could lead Lewis and Bank of America to costly write-downs and create a drag on earnings. Countrywide lost about $1.6 billion in the last six months of 2007, and the company faces numerous investigations and lawsuits related to its lending practices.
Bank of America has said it will tighten those lending standards, and Lewis predicted Monday that housing conditions will improve by early next year. He also said Countrywide and its professional sales force will give the bank a boost as it pushes to increase market share in the mortgage sector.
"There is a huge sales force already in place that I think could give us a huge head start at a time when the market is ripe for market share gains," he said. "So obviously there is a risk to it, but we are not paying $22 billion either. And so that is the offset."
But Lewis must also be wary of what happened across Tryon Street, and he acknowledged Monday he still has concerns that the housing market still has a "dramatic ways to go before you get to the bottom."
"And obviously we worry about that a lot," Lewis said. "I personally worry about that a lot."
