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Bank of America Corporation (NYSE:BAC)

Countrywide Acquisition Announcement Call

January 11, 2008 8:30 am ET

Executives

Lee McIntyre - Investor Relations

Kenneth D. Lewis - Chairman of the Board, President, Chief Executive Officer

Joe L. Price - Chief Financial Officer

Analysts

Mike Mayo - Deutsche Bank

Ron Mandel - GIC

Nancy Bush - NAB Capital Research

Edward Najarian - Merrill Lynch

Ann Macek - Deutsche Bank

Ronald Temple - Lazard Capital Markets

Lori Appelbaum - Goldman Sachs

Jason Goldberg - Lehman Brothers

Jeff Harte - Sandler O’Neill & Partners

Don Jones - Credit Suisse

Doug Smith - Fir Tree

Betsy Graseck - Morgan Stanley

Operator

Welcome to today’s teleconference. (Operator Instructions) I will now turn the program over to your moderator, Mr. Lee McIntyre. Go ahead, sir.

Lee McIntyre

Good morning. This is Lee McIntyre, Investor Relations, Bank of America. Before Ken Lewis and Joe Price begin their comments, let me remind you that this presentation does contain some forward-looking statements regarding both our financial condition and financial results and that these statements involve certain risks that may cause actual results in the future to be different from our current expectations.

These factors include, among other things, changes in economic conditions, changes in interest rates, competitive pressures within the financial services industry, and legislative or regulatory requirements that may affect our businesses.

For additional factors, please see our press release and our SEC documents. I will now turn the call over to Mr. Ken Lewis.

Kenneth D. Lewis

Good morning and thanks for joining us on short notice. I apologize for the late start. We had a backlog of people trying to get in and wanted to accommodate them as best we could.

We’ve asked you to join us today to talk about the acquisition of Countrywide. For years I’ve talked about the importance of the mortgage product to the consumer relationship. I’ve also been asked on many occasions about acquisitions and Countrywide more specifically.

I have consistently told you that while I like the mortgage product as a cornerstone of the customer relationship, I didn’t necessarily like mortgage companies because of valuations. I’ve also consistently said that arithmetic would have to be very compelling to make it work.

Today’s announcement presents a unique opportunity to acquire the mortgage capabilities and scale that are critical to our customer relationships at a time when valuations are in fact very compelling. Our extensive due diligence supports our overall valuation and pricing of the transaction.

Now, before we start, let me ask that you limit your questions to today’s topic as we release, as you know, earnings on the 22nd and will discuss the fourth quarter results and our usual outlook at that time.

This acquisition further advances our long-term strategy of having leadership positions in the cornerstone products of the consumer relationship. We’ve held the leading position in deposits for many years. We gained a leading position in cards with our acquisition of MBNA in 2006. As we have described for many years, the only important product for our scale that did not match our product position was mortgage.

Alone, we made strides with product and process innovation in mortgage that enabled us in the second quarter to become the largest retail mortgage originator.

What we learned from gaining scale in the products was information about customer behavior that allowed us to create value for our customers. We created new deposit products like Keep the Change and risk-free CDs. We created new mortgage products like no-fee mortgage, which passed along our savings in selling straight to the customer.

With this transaction, we have now affirmed our relationship with consumers as we gain the leadership position in one of the most important products in our relationship.

Through the first nine months of 2007, Bank of America originated $145 billion in mortgages, making us the fifth-largest player in the business. With a servicing portfolio of nearly $500 billion, we ranked as the sixth-largest servicer of mortgages. We now move to the top of both originating and servicing with a 25% share of the origination market and a 17% share of the servicing market.

And while we are regarded as one of the most efficient mortgage shops, Countrywide has product expertise and a sales culture that tops our capabilities. By utilizing their skill sets, we can offer more mortgage capabilities to our vast customer base.

Also important is the ability to offer their mortgage customer base the most complete product suite of cards and deposits and other financial services of any other financial institution.

When we marry the best practices of sales capabilities and efficient operations, we can dramatically improve the profitability of the company. As I and my management team met with members of Countrywide’s team, I was equally impressed with the industry leading technology they employ in their front and back offices.

So we view this as a one-time opportunity to acquire the best mortgage platform in the business at a time when the value is very attractive.

This transaction fits nicely into our integration plans as well as we’ll run the company separately under the Countrywide brand in 2008 while we complete the integration of the sale. Once the sale is finished, our transition team will move right into the integration of Countrywide in 2009. Really, the actual systems conversion would be some time in the third quarter of 2009.

Let me tell you just a few things that make Countrywide an important product. As I said, they are America’s largest overall originator of mortgages, with leadership positions across all sales channels in retail, wholesale, and correspondent lending. With a $1.5 trillion servicing portfolio, they service more than 9 million loans. They have locations, either loan offices, 700 plus, or banking centers, 200 plus, in nearly every state in the U.S. These offices are focused on the most heavily populated states of California, Florida, and Texas, to name a few, and staff of 15,000 mortgage sales associates.

These associates are led by a long tenured management team that has built an incredible company with areas of operational expertise that has weathered many past cycles. Their balance sheet has more than $200 billion in assets and roughly $55 billion in deposits.

As you are all aware, this year has been tough for them as their model was severely impacted by market liquidity concerns and the ability to fund asset growth. These problems play into our strengths as we have the funding of our deposit book and access to the markets to continue to grow the business.

As you can see from their public financials, over the past several years they have generated substantial earnings and while they changed their model given the housing and market conditions over the past six months, we believe by combining our mortgage operations we can generate strong earnings over the long term.

So before I turn it over to Joe for some details of the transaction, let me say I’m extremely excited about the opportunity to further our strategy with consumers. We look forward to making home ownership dreams come true for years to come.

One more thing though before I turn it over to Joe I want to mention is the acknowledgement of the conditions which we are operating under. There are near-term challenges which remain in this business as we enter this transaction but where there are challenges, there are always opportunities.

We expect continued weakness in housing throughout 2008 and mortgage volumes to continue to decline as a result, but with innovation in products and processes and strong distribution networks, we do expect to improve our share of mortgage originations. We also expect rising credit costs due to this housing weakness as delinquencies and defaults continue to increase.

The good news is much of the originations in the current market are of much higher quality and better spreads than the past couple of years. Last, the secondary markets remain fragile and worth keeping an eye on but many spreads have been improving.

Again, I am excited to gain the mortgage capabilities of the brand leader in the mortgage industry. I am confident that acquiring these capabilities at such a compelling value will drive shareholder value from this transaction as we integrate the platforms. Joe.

Joe L. Price

Thanks, Ken. Let me now take you through some highlights of the deal and deal terms. First, we are buying all of Countrywide and issuing Bank of America stock as consideration. The terms are for an exchange ratio of 0.1822 shares of Bank of America stock for each Countrywide share. This equates to a little more than $4 billion in total cost at today’s market prices.

From a market pricing perspective, this represents roughly 31% of their common book value, or roughly 2.9 times their 2009 projected earnings using the analyst estimates on First Call.

We expect to close the deal in the third quarter after customary approvals from regulatory bodies as well as Countrywide shareholders. We’ve completed due diligence and received both board’s approvals.

Now, as Ken said the due diligence on this deal was extensive. We had more than 60 people on the ground for the better part of the last 30 days, with more focus picking up through the holidays. The focus of the due diligence, as you would expect, was on the mortgage servicing rights, credit, and legal, as well as accounting and operational areas. The results of our due diligence support our overall valuation and pricing of the transaction.

Let me take you through some of the assumptions we considered as you analyze the transaction.

We used the First Call consensus estimates as a base for modeling. We assumed an early third quarter 2008 close so Countrywide results will be in the numbers for one half of the year for 2008. We made adjustments for assumptions of cost savings and some business model adjustments, which leave the transaction neutral to earnings in 2008 but accretive in the following years.

We expect the cost savings to be roughly $670 million after tax but not fully realized until 2011. These savings represent just over 11% of the combination of our consumer real estate first mortgage group and Countrywide's expense base. The savings in year one are minimal with only 33% being realized in the second year.

We estimate a restructuring charge of around $1.2 billion after tax and have excluded the impact of that charge from our modeling of EPS accretion. Some of this will go through the income statement and some will only have a balance sheet impact.

We anticipate that as we migrate their mortgage loan holdings to our balance sheet management model, we would reduce their balance sheet by roughly $50 billion in loans. This move allows the mortgage professionals to focus on origination and servicing versus managing the balance sheet, consistent with how we manage our business today.

Even with a reduced balance sheet, the equity issued in the transaction does not support the assets in the transaction and we anticipate the issuance of additional capital, in addition to the asset reductions, to remain tier one capital ratio neutrality as a result of the deal. Both the anticipated actions of asset reduction and related foregone earnings, as well as capital issuance, are included in our assumptions of the EPS accretion.

Now, to sort of reiterate Ken’s excitement, we are now uniquely positioned in the mortgage business with leading origination and servicing capabilities driven off an industry-leading technology platform led by a deeply experienced management team. This newly scaled leadership in the mortgage product has affirmed our capabilities in the three cornerstone products that allow us to deliver value to customers and win more of their business.

I think you will all agree that such buying opportunities make strategic sense and creates long-term value for our shareholders.

Thank you for your attention and we will now be happy to field any questions.

Question-and-Answer Session

Operator

(Operator Instructions) It looks like we’ll take our first question from Mike Mayo. Go ahead, please.

Mike Mayo - Deutsche Bank

Could you give more detail on the expense savings? What kind of benefit do you get from Bank of America’s improved funding versus Countrywide? And on the operational side, how does this all play out? Because I know you guys say you can cross sell much better to the Bank of America banking centers than you ever would through a standalone office entity like Countrywide. So ultimately, do these become banking centers or do you push Bank of America's mortgage business over to the Countrywide side?

Kenneth D. Lewis

I’ll answer the last piece and then Joe can talk about the expenses and funding. We are going to do a lot of market analysis on the brand, on both brands and see how all this sorts out. But first I would say that our thinking is this is more like MBNA operationally in the sense that we will convert to their system and go that way.

And then we are going to look real hard at whether we do a combination of things -- one, selling products in their mortgage origination offices but also having Countrywide people in our branches, possibly even with the brand if it turns out that the analysis says that people do think of Countrywide mortgages. So it’s going to be a mixture that we can’t -- I can’t quite tell you how it’s going to look like but we are going to be open to having a different operating model going forward than either has at the moment.

Joe L. Price

On the first part of your question, obviously the cost savings that we reflected in the financial summary were really expense levels and those would come from your traditional expected places. The recognition timing is more akin to Ken’s description of the timing of the conversion and the operational aspects there.

From a funding standpoint, obviously one of the attractive parts of this was blending their Countrywide's mortgage expertise origination servicing with our liquidity profile of the company. We think that fits nicely into the structural changes happening in the mortgage industry anyway.

We have not reflected significant funding synergies simply because -- in the modeling simply because the reduction of the balance sheet from that standpoint.

Mike Mayo - Deutsche Bank

And how much capital do you expect to issue?

Joe L. Price

To stay capital neutral on this transaction, and we’ll give you an update on capital for the larger corporation in a week at the earnings call in a little over a week, but in this transaction if you just look at the purchase price, today’s prices it would take you incrementally another couple of billion dollars would be my expectation.

Mike Mayo - Deutsche Bank

And then lastly, the restructuring charge of $1.2 billion after tax, does that also include write-downs on loans at Countrywide? Or if you saw that, would that be in addition?

Joe L. Price

The restructuring charge, think of that more as the typical type of things you see for there, so it would be any merger related costs, et cetera. The purchase price of the company will be allocated to the asset and liabilities on a fair value basis and that’s where you would capture any of the changes to the existing asset and liabilities.

Mike Mayo - Deutsche Bank

Okay, actually just one last one again; what does Countrywide have that you don’t want? You exited sub-prime early and you exited some other areas that they might have.

Kenneth D. Lewis

Mike, going forward, I would see -- obviously the direct origination but no sub-prime. Then you would have a correspondent, but it would not include any large bulk purchases. I don’t like the [inaudible] of large bulk purchases, so we would eliminate that and therefore the correspondent business would be your community banks and entities like that.

And then third, there would be some broker business but very focused on ones that had performed well through this environment and would include obviously no sub-prime brokers. That’s how I envision the model going forward.

Mike Mayo - Deutsche Bank

Thank you.

Operator

Thank you. We’ll take our next question from Ron Mandel with GIC. Go ahead, please.

Ron Mandel - GIC

Thanks. I’m wondering, Joe, if you can expand more on purchase accounting. My superficial understanding is that when you buy below book value like this, so you are buying about $9 billion below book value that you could actually mark the assets down by $9 billion without significantly changing any of the other financials, so I’m wondering how much you think you’ll have to write down assets, build legal reserves, and basically how you plan on using that $9 billion by which you are paying below tangible book?

Joe L. Price

Ron, you are right in describing purchase accounting being that you fair value the assets and liabilities at the date of the transaction and then, after you do that, you compare that to the purchase price and have to in essence squeeze them down to fit it or else you create negative good will.

Based on all of our due diligence, we feel that the purchase price allocation encompasses our ability to take any type of fair value adjustments needs but the specifics of that obviously will have to be worked out at the date of the actual merger, so the fair values at those dates. But it would obviously include between all the assets and liabilities, which a portion of the loans would be there, as well as any other open liabilities that would be accruable under GAAP.

Kenneth D. Lewis

Ron, to me looking at the adjustments on a pretax basis probably gives you a better idea than after tax.

Ron Mandel - GIC

And if the deal were to close today, or whenever you finished your due diligence, what would the allocations have been?

Joe L. Price

What would the what?

Ron Mandel - GIC

The allocations have been of the good will -- the fair value adjustments.

Joe L. Price

I’m not ready to go into the detail allocations, Ron, but you can look at the major asset classes and the major type of contingencies and get a pretty good guess from that standpoint.

Ron Mandel - GIC

And then just one last question related to this; if there is still something -- if there is negative good will created, how does that work? That hasn’t happened in a long time. Does that get accreted into earnings or just stays like positive good will as unamortized? How does that work from accounting --

Joe L. Price

You’re right. It’s not something that we have dealt with for a while but generally, I think that if you end up with negative good will, you first would reduce identifiable intangibles to the extent that they existed and then after that, you would reduce the basis in other, longer term assets.

Ron Mandel - GIC

Okay, and on the capital raising, do you think it will be common or hybrid or preferable? What are you thinking of in that regard?

Joe L. Price

We’ll look at a variety of sources and let me update you on that when we do the larger -- when we do our earnings call and talk about the total corporation.

Ron Mandel - GIC

Okay, great. Thanks very much.

Operator

Thank you. We’ll take our next question from Nancy Bush with NAB Capital Research.

Nancy Bush - NAB Capital Research

Good morning, guys. I’ve got three questions here; does the senior management of -- how much of the senior management of Countrywide will be retained in the deal -- i.e., does Mr. Mozilo go away, question number one?

Number two, from a regulatory perspective, what kind of forbearance are you -- what kind of deposit base are you getting here and is there regulatory forbearance on the deposit cap?

And number three, how are you planning to “[ring sense]” the bad assets that are acquired here and do you have the personnel to do the workout, et cetera, et cetera? Is that going to be an additional cost?

Kenneth D. Lewis

Let me start with Angelo. First, we will keep a number of their senior people who are very, very good operators. If you think about this company, at the operating level there is probably no better mortgage company in the world, but when you have two Achilles’ heels like wholesale funding and sub-prime, that’s been over-shadowed.

Angelo has told me he will do anything we want him to do in terms of how long he stays. I would want him to stay through the -- until the deal gets done and then probably, I would guess that he would then want to go have some fun. But I’ll talk to him next week about his personal desires and we’ll get into the organization at that time as well.

But many of their senior people will have big operating roles in this company.

Nancy Bush - NAB Capital Research

Okay.

Joe L. Price

Nancy, on your second question around deposits, obviously the thrift that is housed within the Countrywide company family has got -- has got a depository institution but it is a thrift-chartered depository institution and does not play into the deposit cap.

Nancy Bush - NAB Capital Research

Okay, so you just get to keep that intact basically?

Joe L. Price

Yes, and then subsequently, it will all depend on where we head with the operational mergers of the things as to where we ultimately fund those.

On your other question, clearly Countrywide itself, and they’ve talked about this publicly, had gone into workout mode on a number of the assets, or some of the tougher assets in the same manner that we would do and that we do on our own portfolio, so it would be the combined resources of those forces that work on that. So from a manpower standpoint, we feel okay.

In regards to “ring sensing”, I think you can envision we would do similar to what we normally do. You generally segregate the assets with a dedicated team as opposed to having the team that’s running the origination and the other operations, and we are kind of in a workout unit and we’d envision doing the same thing and looking for disposition alternatives. That would obviously feed into the asset reduction I referenced earlier, too would be another option there.

Kenneth D. Lewis

Operationally, Nancy, the best analogy I can think of is what we did with the EquiCredit portfolio several years ago.

Nancy Bush - NAB Capital Research

Okay, great. Thank you very much.

Operator

Thank you. We’ll take our next question from Ed Najarian with Merrill Lynch. Go ahead, please.

Edward Najarian - Merrill Lynch

My questions have mostly been answered, so I guess if you could just talk about -- come back to your underlying assumption of 3% earnings accretion. A number of questions have been asked related to how much additional capital you may need to issue or what the purchase accounting adjustments might be. Largely I guess you’ve decided to defer the answers to those questions, so I guess we’ll have to make our own assumptions but could you tell us for sure if the 3% accretion, if the starting point there is the consensus ’09 estimate? And then you’ve added in all of these synergies and capital raising assumptions on top of that, but that is your base case starting point for the underlying starting point for the Countrywide earnings contribution for ’09? Is that how we should think about your assumption process?

Joe L. Price

Let me first add when Mike asked the question, we said it would be -- the incremental capital would be approximately $2 billion. You can kind of look at the asset base and bring down assets by the level that I reference and kind of come to your own conclusion on that, but you’ll come into that range.

Kenneth D. Lewis

And Ed, what we said was we’ll defer any other capital comments until the earnings call.

Edward Najarian - Merrill Lynch

Okay, but just to come back to that, if you are indicating then you are going issue $2 billion of capital in order to hold your tier one capital ratios relatively flat, it would imply a very material write-down. I mean, I don’t have the math off the top of my head but clearly it would imply a very material write-down to the assets and therefore the current tangible book value of Countrywide. Is that a fair statement?

Joe L. Price

Let me back up. I think I understand what you are asking now. In purchase accounting, you have -- let’s take the number of shares that would be issued, their outstanding share base times the conversion ratio times the fair value of our shares or the trading price. That gives you a number that in today’s math approximately $4 billion. That’s the amount in purchase accounting of equity that we will record so you have to adjust their tangible book value down to that. You allocate those adjustments, as I was alluding to earlier with Mike and Ron, based on the fair value, so that is in fact what happens and that’s what my point was, is after -- when you do the math on the shares issue, you need incremental capital to support their asset base.

Edward Najarian - Merrill Lynch

Okay, so by definition, you come out -- your starting point then is $4 billion of tangible capital with a concurrent write-down from where we are today that gets applied to their assets.

Joe L. Price

And liabilities but you fair value the assets and liabilities, but correct, that’s the application of purchase accounting at the acquisition date.

Edward Najarian - Merrill Lynch

Okay, and then if you could make any comments on my original question, to get then to that 3% ’09 accretion level, you are adding in obviously your expense save assumptions, your capital issuance assumptions, but your starting point is the ’09 consensus EPS estimate for Countrywide?

Joe L. Price

For the purposes of presentation here, yes but also it’s been, as I referenced, adjusted for bringing down the asset levels of the company, so that’s included in addition to the things you described.

Kenneth D. Lewis

And therefore a minus to revenue.

Joe L. Price

Yeah, and earnings.

Edward Najarian - Merrill Lynch

Okay, so you have taken out a certain amount of revenue from that ’09 estimate related to your assumptions for reducing the size of their balance sheet?

Kenneth D. Lewis

Exactly, and a model that I described previously.

Edward Najarian - Merrill Lynch

Okay. Thank you very much.

Operator

Thank you. We’ll take our next call from Ann [Macek] with Deutsche Bank. Go ahead, please.

Ann Macek - Deutsche Bank

Good morning. Two questions; one, has the legal structure of the entity been decided? In other words, is Countrywide Financial Holding Company going to remain a separate legal entity within the Bank of America framework?

And then related, with respect to the outstanding debt of Countrywide, do you anticipate an implicit support for that debt or is there some sort of explicit support anticipated?

Kenneth D. Lewis

Over the course of the next six months through closing, we’ll work out an exact structure of the mergers in terms of internal legal entities, so I don’t have anything to report to you on that point.

And then don’t -- I mean, this merger is subject to regulatory approval, it is subject to shareholder vote on their standpoint, et cetera -- a separate legal entity until we merge, so that’s what it is.

Ann Macek - Deutsche Bank

And then on the debt, explicit or implicit once it’s closed?

Kenneth D. Lewis

That’s my point -- they’re a separate legal entity that have their obligations. We have no incremental obligations around that.

Ann Macek - Deutsche Bank

Understood. Thank you.

Operator

We’ll take our next question from Ron Temple with Lazard Asset. Go ahead, please.

Ronald Temple - Lazard Capital Markets

First question -- have you received any form of government support or back stop related to the credit quality of Countrywide’s held-for-investment portfolio?

Joe L. Price

No.

Ronald Temple - Lazard Capital Markets

And I guess part two of that is how are you thinking about the loss content in the thrift loan portfolio? I’m assuming that’s embedded but clearly there’s some concerns around that portfolio, so how have you guys looked at that?

Joe L. Price

Ron, we would have done our own, as Ken just alluded to and I described, we did our own due diligence and clearly incorporated that. And what I can tell you is when you couple that with all of the other items that we covered in due diligence, got comfortable that the economics that we arrived at in pricing the transaction fully reflected the concerns that you are alluding to.

Ronald Temple - Lazard Capital Markets

And when you talk about tangible equity, I am assuming the MSR is considered an intangible asset. I just want to confirm that. How are you guys approaching the MSR?

Joe L. Price

Well, the MSR is not considered intangible in the context of how you typically think of good will from that standpoint. It has specific capital requirements that you need to carry under RBC and under the various attributes. And so as we’ve modeled, we would have modeled with the appropriate -- you know, with the applicable capital requirements embedded for carrying mortgage servicing rights.

Ronald Temple - Lazard Capital Markets

Okay, that helps. Two other quick ones; do you have any protection from legal ramifications? Obviously Countrywide has been involved in some litigation thus far. How should we think about that? I think Ron Mandel kind of referenced that implicitly as well.

Joe L. Price

I’ll go back to the comment I made earlier -- again, our -- you know, clearly focused on those areas in due diligence, both from a corporate as well as a particular product aspect and incorporated that in the economic evaluation arriving at our pricing, or validating our pricing.

Ronald Temple - Lazard Capital Markets

All right. Last question; in terms of, I know you guys don’t focus on this ratio necessarily, but tangible equity, tangible assets -- I mean, how should -- and I appreciate that LaSalle is another moving part that you don’t want to get into but how should we think about that? Is there any kind of philosophically a floor on that ratio that you are thinking about, either of you that you would want to address?

Kenneth D. Lewis

Well, not necessarily a floor but over time, we’d feel the same way that we do about the tier one that over time, we’d have it over 4% and we would have the tier one at 8% or better.

Ronald Temple - Lazard Capital Markets

Okay. Last question -- is there any collar on the deal or any kind of -- no?

Kenneth D. Lewis

No, it’s a fixed exchange rate.

Ronald Temple - Lazard Capital Markets

Great. Thank you very much.

Operator

We’ll take our next question from Lori Appelbaum with Goldman Sachs. Go ahead, please.

Lori Appelbaum - Goldman Sachs

My questions were largely asked by Ron and Ron, but I’ll try again anyway. Joe, you mentioned that much of the due diligence was spent on the MSR credit and legal and that was a factor in how you set the exchange ratio. If you could provide any key assumptions across those three measures at all in coming to the exchange ratio.

Joe L. Price

No, not really and let me clarify, Lori; what we did is we did our due diligence and then obviously our exchange ratio was established based on market pricing and all the other attributes that you would consider in that. And what I was meaning is that our due diligence findings were supported or fully encompassed in when we set that exchange ratio.

But no, I’m not prepared to provide any detailed specific estimates on particular items and obviously that will change up through the date of application of purchase accounting once the deal is approved in early third quarter.

Operator

We’ll take our next question from Jason Goldberg with Lehman Brothers. Go ahead, please.

Jason Goldberg - Lehman Brothers

Thanks. I was hoping you could shed some more light in terms of additional details on the planned asset dispositions.

Joe L. Price

What I was really referencing is the, you know, carrying home mortgage loans in a separate consumer unit versus utilization to manage our interest rate risk and our net interest income, it would be the migration. So if you think about the way we run our company, as we talked about before, we would be simply following that pattern and in managing both capital requirements as well as our overall rate sensitivity -- and quite frankly, embedded credit risk that many questions have been focused on. We would look to the -- that would drive that reduction and it may not be exactly the $50 billion referenced but we figure that’s a pretty good proxy for where we think we’d end up at that time.

Jason Goldberg - Lehman Brothers

Okay, and then Ken, in the past, you’ve been very critical of mortgage servicing accounting. Any new thoughts on that or how do you think about that now?

Kenneth D. Lewis

Well, that’s the one thing I couldn’t eliminate. We eliminated the sub-prime and we eliminated the bulk purchases but we’ll have to live with this and they’ve managed it very well and we have as well. But in a perfect world, I wish that had gone away but it doesn’t.

Jason Goldberg - Lehman Brothers

Okay, and then lastly, could you just give us any additional color in terms of how you see mortgage losses playing out within their portfolio?

Kenneth D. Lewis

Well, that would be embedded in the purchase price and in our assumptions on earnings going forward.

Jason Goldberg - Lehman Brothers

I guess give us more details in terms of how you arrive at those figures.

Kenneth D. Lewis

We’re not prepared to do that now and we certainly don’t want to go by category. Just remember, Countrywide is a separate public company with its own reporting obligations. We still have a lot of approvals in front of us, et cetera. So that would be in essence asking us to forecast their earnings.

Jason Goldberg - Lehman Brothers

Okay. We’ll do that. Thanks.

Operator

(Operator Instructions) We’ll take our next question from Jim Harte with Sandler O’Neill. Go ahead, please.

Jeff Harte - Sandler O’Neill & Partners

Most of my questions have been hit, two left; one, I understand that the due diligence process from the credits and what’s in the portfolio standpoint. Can you talk a little bit more about how you got comfort on the litigation and potential regulatory side? Because we’re looking at one of the biggest sub-prime issuers out there and with sub-prime having a lot of problems and government entities looking into it and lawsuits potentially looming, how do you get comfortable with your potential exposures on those two fronts?

Kenneth D. Lewis

Well, all I can say is we had a lot of advice from both our internal group and also from two other entities that put some parameters around it.

Jeff Harte - Sandler O’Neill & Partners

Okay. And finally, when we talk about the mortgage servicing rights, can you quantify at all how much of an advantage Bank of America would have as far as the capital that would have to be held against mortgage servicing rights relative to a Countrywide?

Joe L. Price

Actually, I don’t view that as an advantage per se from that standpoint. I think the economic capital required, we would most likely be very similar from a regulatory standpoint. It’s obviously driven by the applicable RBC rules from that standpoint.

Jeff Harte - Sandler O’Neill & Partners

Okay. Thank you.

Operator

We’ll take our next question from Don Jones with Credit Suisse. Go ahead, please.

Don Jones - Credit Suisse

Good morning. Thanks for hosting this call. There was a question asked earlier about structure. I know you guys haven’t finalized that but if this is Countrywide as a subsidiary, a finance subsidiary of Bank of America, would that indicate that there would be on the debt ratings that there would probably be a notch lower rating on the senior type of debt structure for the Countrywide issues?

Kenneth D. Lewis

Not something I’d want to speculate on.

Don Jones - Credit Suisse

My apologies -- not necessarily on the rating, but -- so these senior Countrywide obligations won’t be para passu with senior Bank of America holding company obligations, correct?

Kenneth D. Lewis

Well, are you talking -- post merger, we will obviously look at the operating entities and construct what we feel to be the most optimal scenario, both from an operational as well as financial standpoint. But that’s still yet to be determined.

Don Jones - Credit Suisse

Okay, great. Thank you.

Operator

We’ll take our last question from Doug Smith with Fir Tree. Go ahead, please.

Doug Smith - Fir Tree

Good morning. Two questions; the first is do you expect Countrywide will continue to pay its common dividend until the transaction closes? And the second question is do you anticipate providing any liquidity support to Countrywide before the transaction closes?

Kenneth D. Lewis

I’d refer you to Countrywide's team to talk about the dividend and obviously the requisite provisions of the agreement will be filed within the requisite period here pretty quickly.

And then on the liquidity side, again I’d refer you to the Countrywide team to talk about the interim period between now and the necessary approvals to be able to consummate the transaction from that standpoint. But obviously part of our analysis was their liquidity plan and the ability to maintain their operation through closing.

Operator

We’ll take one more question from Betsy Graseck with Morgan Stanley. Go ahead, please.

Betsy Graseck - Morgan Stanley

Thanks. Just a question on the preferred investment that you have; is there any change in the valuation that you would need to address with this transaction?

Joe L. Price

No, Betsy. I mean, mechanically, ultimately at the merger date that kind of eliminates some consolidation at the total company level and then again, depending upon the legal entity structures, we’ll determine whether internally it stays outstanding from there.

The numbers that we were describing earlier though as we were talking about the purchase price compared to tangible book value or to book value, we’re talking about common book value so that would have excluded the preferred, you know, the equity that was attributable to preferred also.

Betsy Graseck - Morgan Stanley

Thanks.

Operator

I would now like to turn it over to Mr. McIntyre for any closing remarks.

Lee McIntyre

No, we have none. Thanks.

Operator

This concludes today’s teleconference. Thank you for your participation and you may disconnect at any time.

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Source: Bank of America Countrywide Acquisition Announcement Call Transcript
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