Three years after breathing life into a drowned Countrywide Financial, Bank of America is probably wishing it had just let the lender sink. BofA has already lost $8.5 billion in one lawsuit, with others still pending that could more than double that amount. So what’s the nation’s largest bank to do? Maybe put Countrywide in bankruptcy.

The New York Times’ Deal Professor explains the complications in doing so:

When Bank of America acquired Countrywide, it did not become responsible for its past misdeeds and any litigation liability. This is true even though it is now clear that Countrywide was insolvent at that time. Even so, Bank of America could have had Countrywide Financial put into bankruptcy and cordoned off these liabilities. It could still have done this today had it continued to operate Countrywide as a separate company.

Unfortunately for Bank of America, it didn’t keep things so neat when it acquired Countrywide. Instead, Bank of America engaged in a number of complex transactions to consolidate Countrywide into its operations.

According to the recent AIG lawsuit against BofA, the various transactions between BofA and Countrywide ultimately turned Countrywide into a shell company with assets of $34.46 billion, some of that coming from BofA loans.

If the lawsuits and other settlements drain the shell of more than this amount, Countrywide would have no more funds and declaring bankruptcy would seem to make sense.

But would this absolve BofA of additional liabilities? Here’s the Deal Professor again:

[I]n any bankruptcy proceeding, anyone with claims against Countrywide will argue that Bank of America fraudulently transferred out Countrywide’s assets. And there are other legal arguments, including that Bank of America should be liable for Countrywide’s debts because of these transfers. The A.I.G. complaint against Bank of America, for example, makes a similar claim, arguing that Bank of America is a successor in interest to Countrywide by virtue of these transfers.

At the absolute very least, BofA would continue burning through big bucks in legal fees while it researches and fights these claims for several years, and possibly decades, says the Deal Professor.

Talk about buyer’s remorse.

For Bank of America, Countrywide Bankruptcy Is Still an Option [NY Times]

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