A Merger Deal Gone Bad

As Bank of America continues to struggle with the high number of foreclosures, there is talk that the bank could push Countrywide into bankruptcy.  Amidst the height of the financial crisis in 2008, Countrywide, a company that specialized in home mortgages, was going under because of the high amount of foreclosures.  Bank of America merged with the company to try and relieve some of the problems the company had to deal with.  Since the merger two years ago, the Countrywide unit has caused nothing but trouble for Bank of America.  One analyst says that Countrywide units account for 86% of Bank of America's overdue mortgage loans (see article).  There are rumors that Bank of America is considering dropping Countrywide and pushing it into bankruptcy rather than resolve its issues.

If Bank of America does push Countrywide into bankruptcy, this event could have enormous repercussions in the consumer banking industry.  Bank of America has come under fire in the media recently because of its struggle to sort out its home mortgage issues.  Since Countrywide accounts for most of Bank of America's foreclosures, dropping the company would alleviate a great deal of Bank of America's worries.  This could end up making the company stronger in the end.  On the other hand, pushing Countrywide to bankruptcy could have negative repercussions in the rest of the system.  This news is clearly an example of some of the negative effects of a merger.  While some companies merge to make a single stronger firm, Countrywide's weakness clearly has poisoned Bank of America.  

Regarding an investment recommendation, this news serves as further evidence of why the investment recommendation should not support Bank of America.  The bank has already come under fire for other issues, and these rumors add to the growing list of reasons why investing in this bank would not be a good idea.

-Justin Schaffer

http://blogs.wsj.com/deals/2010/11/02/could-bofa-push-countrywide-into-bankruptcy/