Business Blog: Hoover’s Business Insight Zone

Today’s Company of the Day is Countrywide Financial.

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Countrywide Financial originates about one out of every six mortgages in the US. That’s good news for the company — when the housing market and credit markets aren’t in shambles. Unfortunately, that’s not the world we live in today. In recent weeks, as the credit crunch has rippled out beyond the realm of subprime lenders, rumors have swirled about Countrywide, as they have for many other mortgage lenders. After all, if these market conditions can take down American Home Mortgage, why not Countrywide? But the market chatter abated last week, after a white knight by the name of Bank of America rode to Countrywide’s rescue, wielding a $2 billion equity investment.

If $2 billion can ever be talked about as a small sum of money, Bank of America can do that talking. The bank, which ranks #2 in the US behind only Citigroup, has more than $1.5 trillion of assets under management. It looks to have gotten the sweet end of the deal, both because it earns interest on the investment and because it can convert its investment into shares of Countrywide at $18 — a discount relative to current prices, and not far above the lowest price of 2007. If Countrywide is still fundamentally sound and merely short of ready cash, Bank of America should make a nice return from its investment; meanwhile, Countrywide can take the new equity and go on about its business with its head above water. But if, in fact, Countrywide’s business is not so sound — that is, if it made more lousy loans than it’s letting on — the outcome could be ugly. Not so much for Bank of America, which is on the hook for “only” $2 billion, but for a company that set the tone for the countrywide mortgage boom of the early 2000s.

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