Arguably Bank of America had Merrill shoved down their throats, but no one can say that about the acquisition of Countrywide. And Countrywide could end up costing BAC $50 billion or more in losses. That may prove to be a serious candidate for worst deal of the decade. (Although WAMU is a leading candidate too!)

Let's look at a report by Branch Hill Capital, a hedge fund out of San Francisco. And before we start on it, let me point out they are short Bank of America. You can see the full PowerPoint at http://www.businessinsider.com/bank-of-america-mortgage-report-2010-10#-1.

(And let me say a big thanks to the author of the report, Manal Mehta, for all the background material he sent me and his help with this week's letter. It helped make it a lot better. Of course, any erroneous conclusions or outrageous statements are all mine.)

First, they point out that the potential size of Bank of America's (BAC) liabilities is $74 billion (with a B). And that is just for Countrywide. That does not include Merrill, which is also large. Against that they have set aside $3.9 billion. You can count on more suits than just the PIMCO, et al. mentioned above.

In the MBIA case, the judge has ruled that the suit can proceed even though BAC has denied responsibility. Although on appeal, this is high-stakes poker. Countrywide originated over $1.4 trillion of mortgages in 2005-2007. MBIA alleges that over 90% of the defaulted or delinquent loans in the Countrywide securitizations show material discrepancies. Care to take the under in the over/under bet on that?

Further to the case on BAC, Merrill was the largest originator of subprime CDOs during the housing boom, for another $120 billion, along with about $255 billion of residential mortgage-backed securities.

And then there are all those CDOs (collaterized debt obligations). Merrill did a lot of those that went sour. This deserves its own letter, but a gentleman named Wing Chau went from making $140k a year to $25 million in just a few years, putting together CDOs from Merrill, some of which were completely bankrupt in just six months.

Eoin Treacy's view Anyone who failed to do the necessary due diligence on complex debt instruments such as CDOs and subsequently took a loss isn't going to get much sympathy from most people. However, if they can demonstrate that the contents of these portfolios were misrepresented in the sales process then they have a legitimate case to bring against those who securitised the loans.

Given the extent of losses endured by large buyside institutions, they may view the litigation process as a get-out-of-jail-free card since they may be able to put some of their losses back onto the originators. In any case given the size of the importance of the issues involved and the range of possible plaintiffs this issue is likely to rumble on for quite some time.

This additional article from Bloomberg may also be of interest. I last reviewed some of the banks most affected by this breaking story in Comment of the Day on October 18th when I posted John Mauldin's initial piece and the comments remain relevant today.

MBIA is also worthy of mention because it is one of the shares most likely to gain from this furore. Following a precipitous decline in late 2007, the share appears to be in the process of completing a two-year base. It has posted a progression of rising reaction lows since late 2009, the 200-day MA has turned upwards and it successfully broke above $10 in September. A sustained move below that level would now be required to question potential for additional upside.