BofA Needs to Rework Countrywide Deal

Last summer, BofA injected $2 billion into the struggling lender as the credit crunch intensified.

At the time of the deal BofA CEO Ken Lewis said the bank was "aware of the issues within the housing and mortgage industries" and that the deal "reflects those challenges." Still, there are similarities to Wachovia's 2006 acquisition of California option adjustable rate mortgage specialist Golden West for $25 billion -- a deal made right before the housing bubble burst, which has been the source of untold pain for the bank.

Wachovia's CEO Ken Thompson was criticized for his pricey deal at the time, but soon embarked on a campaign to assure shareholders that Golden West's option ARMs were of much better quality than those of the subprime block. But after the severe housing downturn, where home prices in some California areas dropped 20%, the company is now conceding that losses in the Golden West portfolio are rising.

Thompson recently admitted at the Charlotte-based bank's annual meeting that Golden West was an "ill-timed acquisition," according to media reports.

Wachovia was looking for retail branches and entry into the California market. BofA coveted a mortgage platform that it could append onto its already vast financial services platform.

"However, both [BofA and Wachovia] simply did not understand the depth of the problems that the companies they were acquiring had and therefore overpaid," says Richard Bove, an analyst at Ladenburg Thalman. "You can argue that a number of banking companies made this mistake. ... [T]he bottom line is they should have understood."