Is this the worst deal ever in American finance?
A $40 Billion Business Lesson
(posted with permission from: http://sane-ramblings.blogspot.com/2012/07/40-billion-business-lesson.html)
Four years ago when the Bank of America (B of A) paid $2.5 billion for Countrywide Savings*, then the U.S.'s biggest home mortgage lender, it believed it had made a memorable deal. B of A was right, for the deal is now so memorable, it has now lost $40 billion from that deal and it's losses continue to mount. What can we learn from that horrific transaction:
1) In buying a company or anything else expensive, we should do our homework, known as "due diligence" among businesspeople. Had the B of A done thorough due diligence, it would have found many thousands of sub prime and variable rate mortgages already going bad and anticipated many more to follow.
2) Don't rush into a transaction. The B of A had several months to investigate the Countrywide transaction but it clearly wasn't enough time. If someone insists we must buy right now or lose out, unless we are ready, we should pass. There are always new transactions that come along.
3) Bigger isn't always better. The B of A wanted to become the U.S.'s biggest originator of home mortgages and they did, with disastrous results. It is often better to master what one does well, even if not becoming the biggest in an industry.
Summary: In hindsight, it is easy to see where the B of A went wrong, a $40 billion lesson. But if B of A with all of its resources can make such a mistake, so can you and I. Perhaps it will learn from one of the largest business mistakes in U.S. history but in any case you and I can learn from it and it won't cost us a penny.
*To learn more about that B of A Countrywide transaction, please see "B of A's Blunder: $40 Billion-Plus," The Wall Street Journal http://online.wsj.com/article/SB10001424052702303561504577495332947870736.html
