The Great Undoing of Bank of America

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Bank of America  (NYSE: BAC  ) has been near-mortally wounded. But that may be good news.

B of A's evisceration came by its own hand. An unintentional seppuku attempt, if you will. You may have heard a bit about this already, but this all went down in January 2008, when the bank agreed to buy a little mortgage outfit known as Countrywide Financial. 

Believe it or not, at the time, there was optimism around the deal. One asset manager at the time was quoted as saying, "Buying Countrywide was a gutty move ... The whole concern about housing and the economy has been greatly exaggerated." Bank analyst Dick Bove was on the same page, claiming that an ugly quarterly report around the time of the deal was a "clean-up" quarter for Countrywide, continuing, "Bank of America is asking them to look into every place they can find to take losses, so when they become Bank of America, we don't see similar impacts."

But it wasn't to be. The "whole concern about housing and the economy" wasn't, in fact, overblown, and the decision to buy Countrywide was an abysmal one.

Of course, I'm far from the first to say that Countrywide was essentially a bought-and-paid-for cancer for Bank of America. This has been said to such an extent that some investors may wonder if Countrywide is simply the scapegoat for an overall ailing bank. But, rest assured, that's not the case -- the Countrywide acquisition was every bit as bad as billed.

Countrywide... What a drag! | Create infographics

If you actually dig through B of A's annual report, you can find a helpful little table that shows the performance of the loan originations that were sold to the GSEs -- primarily Fannie Mae  (NASDAQOTCBB: FNMA  ) and Freddie Mac -- between 2004 and 2008. What's even more helpful is that the table breaks out the Countrywide originations versus the "other" originations -- principally, legacy Bank of America production.

As shown above, the numbers are pretty stark. On a percentage basis, 8.1% of "other" originations during that period have defaulted or are severely delinquent. It's 13.1% among the Countrywide originations. But the sheer size of the origination machine at Countrywide makes this gap even worse, because the total GSE originations from Countrywide during that period was nearly $850 billion versus just $272 billion at legacy Bank of America.

The felt impact of this at Bank of America was repurchase claims, lawsuits, multi-billion dollar settlements, and the like. Maybe, even more painfully, it was the growing perception that Bank of America itself was, and is, a terrible lender.

It's with that latter point that there's some silver lining in this sad story. The Countrywide acquisition highlights just how disastrous the wrong deal can be for a company. There's a solid argument to be made that the B of A-Countrywide tie-up was one of the worst in corporate history. But the recognition of the fact that a good deal of B of A's post-crisis troubles have been driven by the Countrywide cancer should give investors some hope that, as that mess continues to get cleaned up, there's a good, solid bank hiding out in there somewhere.

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