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Friday, August 24, 2007

Life lessons from Bank of America's investment in Countrywide Financials

Countrywide Financials got a fresh lease of life this week, thanks to the investment of $2 billion by Bank of America Corp. With the recent turmoil in the financial and housing markets related to the sub-prime mortgages, some analysts had predicted that Countrywide would soon be going bankrupt. Fortunately, for Countrywide Financials, the prediction is expected to be postponed at least for some time, if not for good. The whole Countrywide Financials saga, however, provides valuable business and life lessons.

Countrywide Financials has been in business for many years and has become one of the leading company providing mortgages to home buyers. When the recent lending crisis erupted, the company, like many other mortgage lenders, found itself short on liquidity. As the company had relationships with many different banks, it went to these banks to seek help. However, as per the company’s CEO, Angelo Mozillo, most of those banks refused to get involved, saying that they were having their own problems with mortgage lending. Unlike these banks, however, Bank of America saw opportunity and met with the company, resulting in its investment of $2 billion. Ironically, many years earlier, Angelo Mozillo had started Countrywide Financials by borrowing $75,000 from the Bank of America.

Although it’s too soon to say the long term impact of this investment on both companies, for now, it seems like a win-win situation, at least in the short run, based on the rise in the closing stock price of both companies (on August 23, 2007). For Countrywide Financials, the investments buys the company more time to weather this financial liquidity crisis. Bank of America, on the other hand, got a chance to buy preferred shares that yield 7.25 percent. In addition, these shares can be converted into Countrywide shares at $18 each. Countrywide shares closed yesterday (Aug 23, 2007) at $22.02 (Bank of America at $51.83, up 18 cents) up – over $4 above the $18 conversion price! So for Bank of America, not only they get to enjoy 7.25% yield, but their investment is already in the money, if they decide to convert their preferred shares! In addition, the investment gives Bank of America a potential opportunity to become Countrywide Financial’s preferred lender in future.

The lesson here? There could be opportunity in crisis. While Bank of America saw potential opportunity in Countrywide Financials, other banks were too absorbed in their own problems to probably even think that it could be an opportunity. That’s the same way with many other businesses and people. Too often, many of us are so absorbed in our day-to-day problems that we don’t even think of potential opportunities around us. When there’re problems or setbacks, many people view it as if they will last for ever rather than realizing that in most cases, that problem will be a history after a while – as they say, “This too shall pass”.

Setbacks happen in virtually every one’s life – the wise thing to do is to not let those setbacks take you down but rather learn any potential lessons they may teach you – such as the mistakes you made, the things you could have done to avoid them, etc. Doing this, will help us in not repeating those mistakes again, and sow the seeds of success in future.

Secondly, the same set of circumstances may be viewed as catastrophic by one business or person, and a golden opportunity by another. For example, writers like J K Rowling had to endure rejection by several publishers before someone saw a value in her writings, resulting in Harry Potter books being introduced to the world! So it's important to realize that there will always be some naysayers in life but you have in you the abilities to prove those naysayers wrong.

For related articles, see:

CNBC: Countrywide CEO: Mortgage Crisis Persists Despite BofA Stake

CNBC: Bank of America Gets Sweet Deal for Ailing Mortgage Lender

Reuters: Countrywide up as financials' liquidity worry eases

Yahoo.com: Bank of America invests $2 billion in Countrywide

Yahoo.com: Countrywide CEO sees recession ahead

TheStreet.com: Countrywide Deal Wins Few Fans

Disclaimer: I am not a financial analyst nor am recommending the purchase/sale of stocks in Countrywide Financials or Bank of America or any other security for that matter. These stocks were listed in my post just to explain the main point of my post.

posted by Ruby @ 8:57 AM

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