Bank of America Has Lost $40+ Billion Since Acquiring Countrywide for $2.5 Billion 4 Years Ago
It has long been said that it’s more important to avoid bad investments than it is to find good investments. “A single bad deal can wipe out a lifetime of work,” or so the sentiment goes. There is a great truth in that. It was the first thing I thought of this morning when I read the Wall Street Journal coverage of the Bank of America / Countrywide Mortgage merger four years ago.
Let’s put the lesson in stark numbers. It won’t be hard to see why University of North Carolina at Charlotte professor Tony Plath called the Bank of America and Countrywide merger, “the worst deal in the history of American finance. Hands down.”
Four years ago – that is only 48 short months – Bank of America was a financial fortress. It decided to buy distressed mortgage lender Countrywide, thinking it was getting a bargain. It paid $2.5 billion. That decision has resulted in such horrifically large losses, that the bank has been forced to write-off $40 billion.
Think about that. They spent $2.5 billion dollars for the privilege of losing $40 billion. They were greedy, naive, or both. With that kind of money, they could have gone and bought a real estate related business like Choice Hotels International, the parent franchiser of Comfort Inn and Econo Lodge, and collected $100+ million in after-tax profit for the past few years, all of which would be sitting in the treasury. Instead, they wanted to build the empire and become the largest mortgage underwriter in the United States. It was ego. I think the management of Bank of America was seduced by the idea of having scope and scale virtually unprecedented in domestic banking.
The Lessons We Can Learn from the Bank of America Deal
What can we learn from it? When considering a business deal:
- Examine the worst possible scenario outcome and decide whether or not you could live with it. If you can’t, don’t pull the trigger, no matter how tempting the deal.
- Don’t short circuit your thinking by acting in haste.
- Structure your positions in such a way that if one asset or company goes down, you can put it into bankruptcy without touching the parent entity.
- It is possible for a stockholder to own a business that survives disaster, but be so diluted in the process that they still experience drastic, permanent capital loss.
Avoiding bad deals is more important than finding good ones. Remember the famous and oft-quoted “rules of business”. The first rule of business is never lose money. The second rule of business is to remember rule number one.
