Here’s an interesting scenario that Credit Agricole’s analyst, Mike Mayo, paints. He suggests that Bank of America might find a Countrywide bankruptcy the best alternative if things in the mortgage world continue to deteriorate.

From the WSJ’s Deal Journal, here is his reasoning:

1) The legal reason: Countrywide is a separate legal entity from BofA, and Mayo says “one would suspect the lawyers at Bank of America tried to limit its potential damage from Countrywide at the time of the merger.” As a possible precedent, he mentions Sam Zell’s buyout deal for Tribune, which filed for Chapter 11 a year later. Presumably, Mayo means Tribune was a separate entity from Zell and his real estate investment firm. That bankruptcy filing hasn’t exactly left Zell smelling like roses.

2) Bad mortgages are all Countrywide’s fault: BofA is neck deep in the Great FauxClosure Crisis of 2010. Mayo says most of those problems can be traced back to Countrywide, which he said originated 86% of BofA’s mortgage loans that are 60 days or more behind on payments.

3) Bankruptcy may be the cheapest option. Mayo figures a Countrywide bankruptcy could cost BofA less than the worst case scenarios of having to buy back huge swaths of mortgage securities from grumbling investors such as Fannie Mae and the Federal Reserve Bank of New York.

Intriguing! Mayo discounts the possibility of this happening because of the hit to its reputation and potential political fallout that would come BofA’s way.

Maybe, but you may remember that at the time of the Countrywide purchase and for a while thereafter there was a lot of talk to the effect that BofA had basically taken one for the team. That it bought Countrywide at the behest of the government to help avert what would have been a catastrophic failure of the firm.  If something along those lines did occur then there might be more than a couple of executives at the bank that are somewhat miffed about the politicians raking them over the coals about robo-signers as well as suggesting they might force them to buy back billions of suspect mortgages.

Perhaps the bank has decided that there is a point at which it makes no sense to continue to suffer hits to its overall franchise in order to prop up Countrywide and if that causes the political crowd to come looking for its scalp, well then there are tales to be told.

Pretty fanciful stuff, but then again a lot of things happened behind a lot of closed doors during the crisis.

Update: This post was republished on Seeking Alpha and one reader left the following comment regarding the structure of the acquisition of Countrywide by BofA. It’s instructive.

Glad to finally see someone talking about this topic. BAC recognized that there was a significant likelihood that Countrywide would ultimately wind up in bankruptcy and care was taken in structuring the basic transaction so that BAC would shield itself from the potential litigation liabilities and acquire the loan origination business which assuming the economy recovers someday will be a valuable business.

The basic transaction steps associated with Countrywide acquisition were:

1) BAC acquired Contrywide stock.

2) Countrywide and certain of its entities sold assets to various Bank of America entities in return for cash several months after the stock acquisition.

There is a pile of cash (and other assets/liabilities) sitting at Countrywide right now. Valid claims are being paid now and will continue to be paid but once the pile is gone Countrywide will file bankruptcy. Plaintiffs are arguing BAC is liable under de facto merger doctrine but this is a long-shot argument and they have had this dismissed in all but one court decision to date. Even the one decision that has gone against them is in the preliminary steps and it is very unlikely it will ultimately succeed contrary to the publicity campaign engaged in by Compass Point.

The wonderful thing about the acquisition structure is that BAC gets to keep the Countrywide loan origination business and frankly creditors are better off than they would be if Countrywide stock had remained in public hands.

Unfortunately, BAC can’t come out and say the above but you would sure think that people would recognize the impact of the BAC legal structure.