In The Big Short, hedge fund investor Steve Eisman recalled the time he heard Bank of America CEO Ken Lewis speak in person:
“I said to myself, ‘Oh, my God, he’s dumb!’ A lightbulb went off. The guy running one of the biggest banks in the world is dumb!”
He sure made some awfully stupid dumb decisions, including the disastrous acquisition of Angelo Mozilo’s predatory lender Countrywide in early 2008—two years into the housing crash. That was one of the worst M&A deals of all time.
The Wall Street Journal uses the proposed multibillion-dollar BofA mortgage settlement as a peg to look at how much Countrywide has cost the bank.
Recall that Bank of America bought Countrywide for what it must have thought was a song: $2.5 billion, and it already owned a $2 billion stake in the company. When you buy a company, it’s supposed to make you money. But when you buy a company you also inherit its liabilities:
Since then, Bank of America’s mortgage division has racked up $17.7 billion in net losses amid rising numbers of homeowner defaults. The company has lost $22 billion since the start of 2010 to investors who demanded the bank buy back Countrywide mortgage bonds.
Other legal payouts include $8.4 billion for home-loan modifications, $108 million to the Federal Trade Commission to settle claims of excessive fees by Countrywide, and more than half of the $67 million fraud-suit settlement involving former Countrywide founder Angelo Mozilo. Mr. Mozilo declined to comment through his lawyer.
Bank of America still faces the prospect of billions of dollars in fines from U.S. and state regulators investigating foreclosure procedures. That mess could cost the company about $7.4 billion on a pretax basis, said Glenn Schorr, an analyst at Nomura Securities.
The Journal isn’t very precise here. Are those $22 billion in putbacks included in the $17.7 billion net mortgage losses or in addition to them? Is that $7.4 billion potential future losses figure included in those numbers? They did after all just take a $6.6 billion loss on “lawsuits, foreclosure snarls, a write-off in the value of its mortgage business and loan-servicing adjustments.”
The Journal for some reason never gives us an overall loss number, which should have been a headline figure.
It also should have pointed out that Countrywide isn’t responsible for all the losses. Bank of America already had its own mortgage business and held 4 million loans. Countrywide added 10 million, so surely some of BofA’s losses are organic, not acquired.
And that $8.4 billion number for home-loan modifications is misleading. BofA almost certainly didn’t pay anywhere near that amount to modify loans under that program, which American Banker in March used said exemplified “How Not to Make a Mortgage Servicing Settlement”:
Although an $8.4 billion figure made it into attorney general press releases and newspaper articles, it was only an estimate by B of A and not a requirement of the settlement, which mandated that the bank modify loans for 50,000 borrowers, not 400,000 — another estimate from press releases…
The Countrywide settlement covered first-lien loans that B of A serviced, but it did not cover the second-lien loan portfolio that B of A inherited from Countrywide. And although B of A has the largest portfolio of second liens in the country, it owned only 12% of the first-lien loans covered by the Countrywide settlement.
According to the Nevada suit, B of A has financial disincentives that stand in the way of its commitment under the Countrywide settlement to modify loans…
Despite the various alleged conflicts of interest that B of A had in servicing the loans covered by the National Homeownership Retention Program, the Countrywide settlement left the administration of the program largely up to the bank.
The Journal pairs its Countrywide deal piece with one on what the proposed settlement means for other big banks. And it misses here by purporting to read the minds of investors—always a sketchy thing, but one that the Journal reports as fact:
But in the peculiar psyche of investors who abhor uncertainty above all else, just feeling confident that more giant settlements are around the corner sent bank stocks higher.
That’s just obviously bogus. I don’t know what “investors” are thinking, but it seems likelier that they sent bank shares higher because the BofA settlement was cheaper than they expected.
But it’s nice to see the Journal actually drop in a homeowner advocate in its story:
Deonna Kirkpatrick, a spokeswoman for Empowering and Strengthening Ohio’s People, a Cleveland group that helps struggling homeowners, criticized the settlement, saying it does little for borrowers.
“Banks have gotten bailouts, and now investors are getting a settlement. What is the settlement for the homeowners?” she asked.
Good question—it sure isn’t that $8.4 billion one mentioned above.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.