B of A Learns No Good Deed Goes Unpunished

At year end 2010 Bank of America had $2.3 trillion in assets, $230 billion of capital, 57 million customers, ranked among the top firms in nearly every major growth market in the U.S., employed 288,000 people, made $150 billion of community development loans a year, donated $200 million to charity annually, and was one of the largest home lenders in the nation.

You might know that B of A acquired two giant firms — Countrywide and Merrill Lynch — during the 2008 crisis. What you might not know is that these acquisitions were done without government aid.

If you are a shareholder of B of A, particularly one with a short-term horizon, you are likely unhappy with the acquisitions. But as a citizen and taxpayer you should be very thankful that B of A stepped up to the plate in the dark days of the financial crisis.

As bad as the crisis was, imagine how much more serious it would have been had Countrywide and Merrill Lynch failed. Countrywide was one of the largest home lenders in the country and Merrill Lynch was the largest investment banking firm. Alternatively, imagine how expensive it would have been for government to provide assistance to resolve those firms.

After completing due diligence on Merrill Lynch in late 2008, B of A concluded that Merrill was in worse shape than anticipated and considered abandoning the deal. Then Secretary of the Treasury Henry Paulson threatened that B of A would regret walking from the deal.

B of A's reward for doing the deals was to be summoned to Congress to explain why senior folks at Merrill Lynch were allowed to receive contractually agreed bonuses at the end of 2008. The Securities and Exchange Commission piled on with an enforcement action claiming the bonuses were not properly disclosed in proxy materials.

Merrill Lynch has proved profitable to B of A, but Countrywide has been very painful. The issue at Countrywide is not so much losses on mortgage loans, but litigation. Other banks find themselves in similar positions, including Wells Fargo which acquired Wachovia (which itself had acquired troubled mortgage lender Golden West Financial) and JPMorgan Chase which acquired Bear Stearns and WaMu.

B of A has been defending tens of billions dollars of legal claims arising primarily from real estate loans at Countrywide and Merrill. Even the Federal Reserve Bank of New York joined the fray, claiming to be duped in its purchase of mortgages.

Having to defend litigation by private parties is unavoidable. B of A's management might be forgiven for assuming that the government would be grateful enough for B of A's acquisition of these two giant problems to go easy on asserting claims against Countrywide and Merrill.

But no good deed goes unpunished. A recent suit against 17 large banks by the Federal Housing Finance Agency involves some $200 billion of loans purchased from the banks by Fannie Mae and Freddie Mac. B of A’s share is $57 billion, mostly related to Countrywide and Merrill. The suit is particularly egregious in that Fannie and Freddie virtually abandoned underwriting standards and embarked on a two-decade long lending binge that was a major contributor to the real estate bubble and collapse.

In addition, B of A and other major banks are facing suits by 50 state attorneys general seeking to reform their foreclosure policies. This has slowed foreclosures to crawl and delayed cleaning up the housing mess.

Bank regulatory agencies have taken enforcement actions against the banks requiring them to conduct massive reviews of their mortgage loan files and foreclosure processes. The banks are spending billions and chewing up scarce personnel resources.