Kenneth D. Lewis is chairman, chief executive officer and president of Bank of America

Bank of America on Wednesday announced that it has made an investment in Countrywide Financial Corporation, the largest mortgage lender in the United States.

Bank of America will invest $2 billion in the form of a non-voting convertible preferred security yielding 7.25 percent annually. The security can be converted into common stock at $18 per share.

"We believe that in the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets," said Kenneth D. Lewis, Bank of America chairman and chief executive officer. "This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country. We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets. Countrywide has a strong mortgage origination business and it services the mortgages of one in seven American households."

Countrywide was the focus of speculation last week as a contender for bankruptcy when it found it could no longer tap the market for commercial paper, or short-term corporate IOUs, a major source of its financing, and a Merrill Lynch analyst said in a report that it could face bankruptcy in a worst-case scenario. The firm borrowed $11.5 billion from a syndicate of 40 banks.

The Wall Street Journal says that though the capital injection from Bank of America is a big plus, investors shouldn't get "too euphoric," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco, who expects Countrywide to post a sizable loss for the third quarter.

The Journal says that Countrywide reduced its subprime lending -- or lending to borrowers with shaky credit histories -- to 4% of loans originated in the second quarter from 10% a year earlier. But it retains exposure to many past subprime and other risky loans sold to other parties.

Bank of America, which is the largest retail bank in the US with 5,700 branches, quit the subprime-mortgage business in 2001. The Journal says that it originated $95 billion in mortgages in the first half of 2007, less than half of Countrywide's $245.13 billion, according to Inside Mortgage Finance.

Bank of America is prohibited by regulation from handling more than 10% of the America's total bank deposits. The Journal says that bank research shows that its customers with a mortgage tend to be credit-worthy and profitable, with an average of five accounts at the bank.

As CEO of Bank of America, Kenneth Lewis leads one of the world's largest financial institutions and the fifth most profitable company in the world in 2006. Bank of America serves more than 55 million consumers and business clients through more than 5,700 retail banking offices, 17,000 ATMs and online banking and bill-pay service with more than 21 million active users.

During Lewis' tenure since 2001, Bank of America's annual revenue has increased from $33 billion to $73 billion; annual profit has increased from $7.5 billion to $21 billion; assets have increased from $642 billion to $1.46 trillion; market capitalization has grown from $74 billion to $238 billion; and total annual shareholder returns (including stock price growth plus dividends) have averaged 20%, doubling peers, the KBW Banks Index, the S&P 500 and the Dow Jones Industrial Average over the same period.

Lehman Brothers closes subprime unit

Also on Wednesday, top US investment Lehman Brothers, a leader in packaging subprime mortgages into securities, said that it would shut one of its home lending units and lay off 1,200 employees. The bank said it would take a $52 million charge to third-quarter earnings.

“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the firm said in a statement.