What Bank of America Was Thinking

I was on the inside of Bank of America for a while as a consultant. I signed a deal that said I wouldn't talk about anything I overheard for three years but it has been much longer than that and I am sure that my thoughts are generally old news. Nonetheless I think they are worth sharing.

Bank of America was heavily investing in Consumer Real Estate, thats what they call mortgages, when the subprime boom hit. The goal at The Bank, was to streamline the entire haphazard process of mortgage application and underwriting. In particular they wanted a single computer system that could automate the entire process. In the past there had be a hodge podge of different systems and departments that did everything from taking applications, to verifying income and assets, to making sure the house wasn't in a flood zone.

The idea here, and behind a lot what The Bank, was doing was that consumer banking was about information. Their real asset was that the mortgage application let them stick their noses in all of your nitty gritty financial information, which they could then use to sell you every product under the sun.

In particular a few key executives were really into this notion that The Bank could be a conduit for every imaginable service related to a home. Bank of America could arrange your lawn service, your pool service, your home security service, everything you wanted. And since, they knew so much about you they could figure out exactly what you wanted.

It was the fees on these service that were going to be real winners. So, what is The Bank getting when they buy Countrywide? They are getting the largest mortgage servicer in the country and access to lots of homeowners whom they plan to sell lots of other stuff to as well.

My concern, however, is this - Bank of America looks so responsible because they didn't really dip into the subprime waters like other banks. My feeling, however, is that this is because they already had a big project going when subprime came along and they didn't want to muddy the waters with this new poorly understood stuff.

However, The Bank is heavily into credit cards, which are going to be the next take a hit. The Bank also is taking on a lot of servicing responsibility with Countrywide. To the extent that
not just subprime but Alt-A and even adjustable rate prime mortgages start to go delinquent, The Bank is going to be responsible for advancing interest payments to the investors in those loans. That is a heck of a liquidity responsibility. I would like to hear more about how The Bank would fare if prime ARM delinquency rose substantially.