With Bank of America dangerously weighed down by costly acquisitions, its longstanding contention that it could jettison its troubled mortgage unit Countrywide must hold considerable appeal within the company's executive offices.

From a legal point of view, B of A appears to have a colorable legal case in claiming in some of its court filings the right to unload Countrywide.

In practical terms, the obstacles to such a move are likely to prove extremely formidable, if not impossible to overcome.

The reasons BofA might like to free itself of Countrywide — notably by letting it fail — are plentiful. The past week in particular has seen a mountain of potential Countrywide-related liabilities.

BofA's stock has simultaneously tanked. AIG this week sued BofA over Countrywide mortgages and is seeking $10 billion.

The bank again increased its estimate of the cost of repurchasing mortgages due to what it terms "rigid" enforcement of terms by Fannie Mae and Freddie Mac.

New York's attorney general has launched a broadside against the company's $8.5 billion settlement with investors.

Reserves for expected additional mortgage losses now stand at $18 billion.

All this Countrywide-related exposure has emerged as the chief threat to Bank of America's financial health and driven its stock market capitalization well below one-half tangible book value.

Standard & Poor's recently abandoned the position that BofA's mortgage exposure is "contained and quantifiable."

Instead, S&P equity research analyst Eric Oja wrote Friday, "We no longer have this view."
If the company's circumstances continue to deteriorate, unloading Countrywide is likely to be an increasing topic of discussion.

Such a move would hold legal risks and likely enrage regulators and bond investors but arguably it's still worth considering.

"If I were B of A, I'd throw it out there," said Paul Miller, an analyst for FBR Capital Markets.
Beyond its legal filings, B of A has refused to take a position on whether a separation from Countrywide is even possible.

Company spokesman Jerry Dubrowski demurred even to discuss the possibility. "We have not commented on this, and we would prefer not to speculate," he said.

BofA originally purchased Countrywide in 2008 through Red Oak Merger Corp., a specially created acquisition vehicle, and has kept the unit at a distance ever since.

Countrywide has maintained its own board, sold its assets to Bank of America and maintained independent bank accounts and accounting, according to a consultant's opinion submitted by Bank of New York Mellon, which itself supported BofA's proposed $8.5 billion private-label settlement.
"Bank of America very likely has a valid defense to claims that it lacked corporate separateness," professor Robert Daines of Stanford Law School wrote in the memo.

In defending suits against Countrywide, Bank of America has routinely sought to maintain that separation.

When MBIA sought to add Bank of America as a defendant in a bond insurance suit against Countrywide, BofA's attorneys argued that any claim against the parent company was "entirely fruitless."

The argument had already weathered at least one courtroom challenge.

Earlier this year in the case Maine State Retirement System v. Countrywide Financial Corp., federal judge Mariana Pfaelzer dismissed B of A as a defendant after concluding Countrywide had not been de facto merged with its parent.

The justification for B of A's proposed $8.5 billion settlement with large bond investors also hinges on the concept of legal separateness: Despite a second expert opinion commissioned by BNY Mellon in support of the claim, the argument is by no means bulletproof.

In the MBIA case the judge ruled the Countrywide acquisition was a de facto merger under New York law that prevented B of A from avoiding litigation.

Branch Capital and other hedge funds have gone so far as to take long positions in MBIA based on the premise that the ruling will hold.

Chris Whalen of Institutional Risk Analytics believes as a practical matter that the maneuver would be tough to pull off.

Were Bank of America to attempt to dump Countrywide, it would likely be deemed a cross-default by bond investors, something generally considered a big no-no for a bank holding company, according to Whalen and others.

"They would be cut off from the swap markets, and the next day [Moynihan] and all of the top management would be removed by the FDIC," Whalen said. "Going that way is mutually assured destruction."

FBR's Miller concurred that the fallout from an attempted Countrywide bankruptcy might be insurmountable.

"I've talked to fixed-income people who've said if they do this I'll never buy Bank of America debt again," he said. "And I don't think the U.S. government would be too happy."

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