The Savior of Countrywide?

By Jyoti Thottam

In an industry built on big talk and swagger, Bank of America's Kenneth Lewis is an anomaly. "I don't feel the need to be a dominant force through talking first or talking the most. That's not one of my needs," he tells me in an interview at the North Carolina bank's office in midtown Manhattan. "Listening can be a competitive advantage. Some people just can't do it."

Lewis looks out over the expanse of Central Park -- a panoramic view he calls the most beautiful in the world -- and describes the last time he exercised that skill. About a month ago, the CEO of Countrywide Financial, Angelo Mozilo, called him to ask for help. The beaten-down mortgage lender, whipping boy for everything that went wrong in last year's mortgage meltdown, was facing rumors of bankruptcy after burning through an $11.5 billion credit line. Lewis had already invested $2 billion of his company's money in Countrywide, a sum by then worth half of that, but he heard Mozilo out. "He just said, 'I at least would like you to look at this company. It's a good company. I think it's time for us to do something.' He's 69 years old. And so we did."

BofA agreed on Jan. 11 to buy Countrywide for about $4 billion in stock, acquiring Countrywide's $1.5 trillion loan portfolio along with its battered reputation and a swamp of lawsuits. You could almost hear the sighs of relief coming from Wall Street -- not to mention the Treasury Department and Federal Reserve -- that someone had swooped in to prevent the collapse of the nation's largest mortgage lender and whatever else it might pull down in its wake. CreditSights analyst David Hendler called the deal a "rescue bid" that would give the markets some much needed stability. The irresistible headline: MAIN STREET SAVES WALL STREET.

Lewis can't muster much enthusiasm for his new role as savior. "It's nice that we could to some degree have an effect that would calm the markets" is all he will admit. BofA can't bail out the Wall Street banks, which have been busy trying to save themselves after absorbing some $100 billion in losses. Citigroup, reeling under the weight of its own sub-prime damage, announced a $9.8 billion loss for the fourth quarter of 2007, forcing it to seek $12.5 billion in new capital from investors including sovereign wealth funds run by Kuwait and Singapore. Merrill Lynch was also combing the world for cash in the face of yet another write-down, expected to be $15 billion.

Lewis, 60, insists that he bought Countrywide for his shareholders, not the greater good. "In no way did any government agency call us prior to encourage us," he says. "I can't say they weren't glad that we did it. But we did it on our own."

Some analysts have speculated that the deal conveniently earns BofA the political goodwill it will need if it ever wants to expand its consumer-banking business. (The bank already holds close to the federal limit of 10% of the nation's deposits.) Lewis says his motivation is much more straightforward: to complete his vision of a truly national bank serving every financial need that any American might have, by adding the one missing piece -- mortgages.

Mozilo may have led Countrywide over the subprime cliff, but he also constructed a formidable mortgage machine -- 1,000 offices in 49 states responsible for 9 million loans worth about $1.5 trillion. Lewis had to figure out whether acquiring it would be worth the legal heartburn, including a shareholders' lawsuit accusing Countrywide's board of improperly helping company executives buy stock. (The Securities and Exchange Commission is investigating Mozilo's trading activity in Countrywide stock.) In California, some borrowers allege that Countrywide lenders steered them into subprime loans even though they could have qualified for better terms. And the city of Cleveland is suing Countrywide, among other lenders, to recover "public nuisance" costs created by a wave of foreclosures.

Before he agreed to take on those burdens, Lewis sent 60 BofA executives to check under Countrywide's hood -- a huge commitment of inside talent for a task that other CEOs would have left to outside lawyers and accountants. The execs liked what they saw. "I kept on getting reports back from people saying they are really good at what they do," he says. "They have great technology at the front end, they have great technology in their operations, and their people are very good at selling."

Whatever problems Countrywide had, he concluded, came from bad decisions at the top, not malfeasance on the ground. Once the deal closes later this year, Lewis pledges to do right by Countrywide's borrowers. "We will bend over backwards not to foreclose," he says. "We will find a way to work things out."

That empathy for struggling customers is hard won. How many other FORTUNE 500 CEOs know what it's like to be denied a mortgage -- as Lewis was when he was a 30-year-old manager newly posted to New York City from Charlotte, N.C.? A native of Meridian, Miss., Lewis was steeped in the gospel of hard work from an early age. When his father left the family, Lewis' mother Byrdine supported him and his sister in Columbus, Ga., by working double shifts as a nurse. Following her example, Lewis worked his way through Georgia State University as an accountant and an airline-reservation agent.

It would be a mistake, however, to construe his banking strategy as public service. Lewis may have been born in Mississippi and raised in Georgia, but he grew up at NationsBank. It is, essentially, the only full-time employer he has ever had, and he has spent the past 38 years of his life singularly dedicated to the mission set out by his equally determined mentor, Hugh McColl, to transform that North Carolina institution into what would become Bank of America.

McColl and his two predecessors laid the groundwork, challenging interstate banking regulations to expand into a regional powerhouse in the Southeast and then on the West Coast, where it captured BofA in 1998 and hauled the name back to Charlotte. Since Lewis became CEO in 2001, the bank's reach has exploded in every direction. BofA is now No. 1 in deposits (with the $47 billion purchase of FleetBoston Bank), No. 1 in credit cards ($35 billion for MBNA) and No. 1 in wealth management ($3.3 billion for U.S. Trust), and with the Countrywide deal, it will soon be No. 1 in mortgages. If Wall Street once looked at this bank as some sort of Southern arriviste, that notion was erased for good in November 2006 when BofA's $243.7 billion market capitalization surpassed that of Citigroup. Blackstone CEO Stephen Schwarzman, the insider's insider on the Street, praises BofA as "a phenomenally successful earnings machine."

While it may be tempting to think of the Countrywide deal as a happy ending to the fable of the subprime-mortgage market, for BofA it is really the climax of a 30-year saga of grand ambition. What next? "The only way to really succeed," Lewis says, "is to find beauty and excitement in organic growth." For BofA, that means getting credit-card holders to open checking accounts and turning mortgage borrowers into private-banking clients. It's the same strategy that Citi has pursued without much success, but Lewis says his bank is focused on just one country, the U.S. "That's a big advantage and a big difference," he says.

Lewis isn't expecting much beauty or excitement anytime soon. He will consider the Countrywide deal a success if BofA earns back half its purchase price within three years. As his competitors announced massive write-downs and losses in their fourth-quarter earnings reports, Lewis wouldn't allow himself to crow. "I don't feel great about ours either," he says. "If we had met our objectives, I'd be gloating, but we didn't." He has warned that next week's fourth-quarter earnings will be profitable but disappointing, and he expects to set aside $3.3 billion in write-downs. So days after the Countrywide deal, Lewis announced a restructuring of BofA's struggling investment-banking business, including a round of 650 layoffs. Unlike Citi and Merrill Lynch, BofA has never made the grade as a big hitter in investment banking.

Of course, BofA hasn't botched its business so badly that it has to beg for money overseas, as they do. In fact, the bank is making foreign investments, not inviting them, with three recent plays in Mexico, Brazil and China. Lewis says those limited stakes are as far as he plans to go. "I don't see buying any bank," he says. Then again, he says of his last three billion-dollar acquisitions: "Certain things came our way." If a good deal calls, Ken Lewis will be listening.

With reporting by Barbara Kiviat/New York