Ken Lewis is the current chairman and CEO of the Bank of America Corporation (BAC), the largest consumer bank in the United States. As the CEO, he has made some incredible acquisitions which have added enormous shareholder value to the company:
- MBNA (2005) $35 billion in cash and stock
- Fleet Boston Financial (2004) $47 billion in stock
- US Trust (2006) $3.3 billion, all cash
However, the latest acquisition, Countrywide Financial (CFC), may spell the end of Ken Lewis’s reign as the prolific leader of this Charlotte, NC banking juggernaut.
Bank of America, in 2007, made a $2 billion dollar stock investment in Countrywide. Subsequently, the current mortgage crisis started to gain steam, where Countrywide Financial became the face and center of attention of this volatile situation. By 2008, the stock of Countrywide had dropped tremendously where a large majority of its mortgage loans were in default and many more predicted to default well into the year 2010.
With the drop in Countrywide’s stock price, the $2 billion dollar investment made by BofA diminished in value. If Countrywide had filed for Chapter 11 bankruptcy, as many analysts predicted it would, BofA’s investment would have become worthless.
So, rather than wait for the ceiling to drop, and report a $2 billion lost on its books, Bank of America decided to buy the entire company in January ‘08 for $4 billion in stock.
However, Bank of America has had its share of losses from this current economic environment as are other financial companies. Adding Countrywide to its balance sheet would only increase its losses well into the near future.
Ken Lewis’s former Charlotte counterpart, former Wachovia CEO Ken Thompson, was ousted recently due to the financial losses at his bank. Like BofA, Wachovia purchased a mortgage lender, California based Golden West Financial. This purchase was made before the current housing market environment. However, California has one of the highest foreclosure rates in the country. Golden West suffered as a result and provided Wachovia with billions of dollars in loan losses.
I believe that if BofA does proceed with the Countrywide merger, Ken’s future at the bank may come to a swift end. BofA will continue to report quarterly losses, just as others in the financial sector. The stock price will suffer and they may have to cut jobs and the dividend rate to conserve capital.
If Ken Lewis can turn this around, he will definitely have earned my respect as a true visionary.
However, I will not buy any BofA stock until it falls into the mid-teens. My time period would be within the spring of 2009. That way, some of the Countrywide losses should be built into its financials. But as of now, I would not touch BofA.
Just speculating....
Disclosure: none
