Economic Triage: BofA to Buy CountryWide, Fed to Lower Rates, Merrill and AmEx in Pain

Signs of the flailing economy exploded across the news in the last 24 hours as huge financial institutions announced losses, giant Bank of America stepped in to buy a failing mortgage lender, and the chairman of the Federal Reserve announced the bank was close to making cuts in its short term lending rate.

Fed Chairman Ben Bernanke indicated in a speech yesterday that the banking regulator was prepared to lower interest rates as much as half a percentage point to 4.25 percent when it next meets on Jan. 29-30.

The “outlook for real activity in 2008 has worsened, and the downside risks to growth have become more pronounced,” Bernanke said in a speech to the Women in Housing and Finance in Washington, D.C. Bernanke said that additional interest rate easing may be necessary.

This morning, Bank of America reported it would pay $4.1 billion in stock to buy mortgage lender Countrywide Financial. BofA paid $2 billion for 16 percent of Countrywide just last August.

Countrywide, once the nation’s largest mortgage lender, has been badly wounded by the subprime mortgage crisis. Its stock has fallen 88 percent in the last 12 months. It closed yesterday at $7.75, up 51 percent as rumors of the buyout spread. Countrywide has originated an estimated $30 billion in mortgage loans while BofA holds more than $100 billion in home equity loans.

This morning the New York Times reported that investment bank Merrill Lynch would take a loss of as much as $15 billion in the fourth quarter due to failed mortgage investments. Many Wall Street analysts had forecast a $12 billion loss, the Times reported. Merrill is scheduled to report its results next week.

Merrill is reported to be seeking as much as $4 billion in additional capital from outside investors in the United States, Asia and the Middle East.

Late yesterday, card-issuer American Express announced it would take a pre-tax charge of about $440 million in the fourth quarter due to slowing cardholder spending, along with rising write offs and past-due loans.

AmEx said its worldwide growth rate of 16 percent for the fourth quarter “trailed off to 13 percent in December … with particular weakness in U.S. billings.” AmEx reported delinquencies in its managed U.S. portfolio increased to “approximately 3.2 percent in the fourth quarter from 2.9 percent in the third quarter, and that the write-off rate … increased to approximately 4.3 percent from 3.7 percent for the same periods.”

Kenneth I. Chenault, AmEx chairman and CEO, said in a statement that the company was seeing weakness in “California, Florida and other parts of the country most affected by the housing downturn.” AmEx projected a slowdown its card spending in 2008, estimating it will grow worldwide 8 to 10 percent though write-off levels “in the managed U.S. lending portfolio will average 5.1 to 5.3 percent for the full year.”

Also this morning, CNBC is reporting that JPMorgan Chase has held "very preliminary" merger talks with Washington Mutual, a U.S. savings and loan that has been hurt by the mortgage markets. No deal is imminent but the talks were held fairly recently.

Last month, Seattle-based WaMu said it expected a net loss in the fourth quarter and that it would cut its dividend, cut more than 3,000 jobs and raise up to $2.5 billion in fresh capital. CNBC is reporting that JP Morgan also may be interested in two other regional banks, Suntrust Banks (NYSE:STI) and PNC Financial Services (NYSE:PNC).