About four months ago the headline of the financial news was Bank of America buys Countrywide Financial for $4 Billion. The news had a temporary soothing effect on the markets, which were being roiled by the housing bust.

But then an unexpected news story appeared the other day:

Bank of America Corp is likely to renegotiate its deal to buy Countrywide Financial Corp down to the $0 to $2 level or completely walk away from it, said Friedman, Billings, Ramsey, [analyst Paul Miller] ...

Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity ...

"We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away," Miller said.

Suddenly the "done deal" no longer appears to be done. But that is only the start.

Ratings agency S&P cut Countrywide’s (CFC) debt to junk Friday, citing Bank of America’s (BAC) failure to commit to a guarantee of Countrywide’s obligations after Bank of America completes its $4 billion takeover of the mortgage lender. S&P cut Countrywide to “BB+/B” from “BBB+/A-2.” Triple-B is the lowest investment grade. S&P’s decision comes just days after Bank of America said in a regulatory filing that it hadn’t decided whether to guarantee $38 billion in Countrywide parent debt. “There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the company wrote on page 59 of the filing said.

A major lender who borrows money at junk rates is not a lender who is going to stay in business for very long. But why did BofA bother making the offer in the first place?

Well, there might be more than meets the eye to Countrywide's books.

In March, the Justice Department and the F.B.I. began investigating whether the Countrywide Financial Corporation, the troubled mortgage giant, misrepresented its financial condition and loans in filings with the Securities and Exchange Commission.

Countrywide is also under scrutiny by California and Illinois; federal prosecutors in Sacramento; and the United States Trustee, the federal agency that monitors bankruptcy courts. The S.E.C., meanwhile, is examining stock sales by certain Countrywide executives.

Despite Countrywide's obvious financial distress, they continued to be the top mortgage originator in the country through the first quarter of this year. And this was happening even while the housing market is imploding.

Something is fishy. Why was Countrywide heavily leveraging itself at a dramatic rate while it lost $900 million in the 1st quarter?
This smells like management making a Hail-Mary pass with the future of the largest mortgage lender in America, while raking in millions for themselves at the same time.