Timing of BofA's Countrywide deal questioned

NEW YORK (Reuters) - The timing of Bank of America Corp's $4 billion deal to buy battered mortgage lender Countrywide Financial has some investors stumped.

They wonder if Bank of America would have been wiser to wait until Countrywide spiraled into bankruptcy as many analysts and credit rating agencies anticipated.

The gamble could pay off and protect Bank of America's earlier $2 billion investment in the mortgage lender, but some worry Bank of America has only added to an already losing position in the company.

"At one level you think these are smart, aggressive people, but at the same time, banks have done a lot of dumb things in the past," said James Cox, a securities law professor at Duke University. "They still stand to lose their investment...and $6 billion is a heck of a lot to write off in a short period of time."

Moreover, Countrywide comes with several class-action lawsuits, investigations by state attorneys general and other liabilities.

"In most of the litigation against Countrywide, had this deal been post-bankruptcy there would have been a much more adverse affect on those litigants," said Sal Graziano, a securities class action attorney at Bernstein, Litowitz, Berger & Grossman LLP. "Their claims would have had the risk of being extinguished in a bankruptcy."

In the end, the deal's timing may allow Bank of America to clear up some of Countrywide's troubles before they worsened. It is also possible that a bankruptcy filing could have destroyed much of the value of its original investment.

One reason Countrywide and Bank of America may not have wanted to see a bankruptcy is because of Countrywide Bank, the company's federally chartered thrift.

With about $60 billion in deposits, Countrywide Bank is the 14th-largest U.S. bank, according to the Federal Deposit Insurance Corp (FDIC). But if Countrywide was really in trouble, the FDIC may have taken receivership of its assets, reducing Countrywide's value.

For example NetBank Inc, an Internet-only savings and loan, became the largest U.S. bank to fail in 14 years when it filed for bankruptcy protection in September.

The U.S. Office of Thrift Supervision blamed NetBank's failure on bad loans, weak underwriting, poor documentation, and a lack of proper controls, all of which may sound familiar to Countrywide shareholders.

Countrywide faced record levels of defaults and late payments in its servicing portfolio, and could have become the next NetBank without the Bank of America deal, said Chris Whalen, senior vice president of Institutional Risk Analytics.

"If they hadn't done this deal to sell Countrywide, I think there's a pretty fair assumption that there would have been a regulatory closure of the bank within the first quarter of 2008," Whalen said. After that, Countrywide would have likely been forced to file for bankruptcy protection, Whalen said.

Representatives from Countrywide and Bank of America did not return calls seeking comment.

Bank of America may have timed the deal perfectly, waiting until Countrywide's woes drove its stock price down to levels not seen in more than a decade, so it could pay the lowest possible price without worrying about competition.

Three days before the deal was announced, Countrywide denied market speculation that it would seek bankruptcy protection.

"To do a deal in bankruptcy you basically have to do an auction to the highest bidder and it's very unclear who would bid in that kind of open process and how long it would have taken," said David Healy, a partner and co-chair of the M&A group at law firm Fenwick & West LLP.

(Reporting by Emily Chasan, editing by Leslie Gevirtz)