Bank of America invests in Countrywide

Bank of America Corp, the second-biggest U.S. bank got all the praise when it announced its $2 billion investment in Countrywide Financial Corp, the nation's largest mortgage lender.

The investment will not only help the latter to withstand problems with defaulting subprime loans, improve the home lender's ability to sell mortgages but also prevent any further losses at the mortgage lender from hurting the economy.

On August 23, 2007, Bank of America (BOfA) had announced a $2 billion dollar repurchase agreement for Countrywide Financial Corporation. This tantamount to a potential 16 percent stake in the latter. The repurchase was to be financed from the proceeds of an $500 billion dollar Fed Funds emergency short term loan for liquidity.

Expressing happiness on BOfA’s gesture could lead to better ties between the two organizations, Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo said, “As we get to know each other better, and each of our operations better, I think it's likely we will have an opportunity to do things together to enrich the shareholders of Bank of America and also Countrywide. This transaction goes far beyond' Bank of America's $2 billion investment.”

Countrywide, which handles about one out of every five U.S. home loans was entangled in a huge cash crunch and had lost half its value in the last few months. To make matters worse for Countrywide, mortgage investors were alarmed by media reports which questioned Countrywide’s health. So much so that a Merrill Lynch & Co. report stated that the lender may face bankruptcy.

The BOfA investment may not be a panacea though. Circumspect analysts argue that this move is more of a Band-Aid approach to a bigger problem. Mozilo too agreed that the crisis was far from over. However, expressing optimism he said, “We're in better shape today than we were yesterday.”

All said and done, the market for non-guaranteed mortgage bonds has improved over the past two days, which are encouraging signs. Countrywide may soon see the good old days back again.