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"I knew we'd get adverse publicity," he said at a conference in New York. "I didn't anticipate the level of pain and political feedback. But I still think it's the right thing to do."

Lewis touts the importance of becoming No. 1 in a "touchstone" product such as mortgages. Along with a large sales force originating new mortgages, Countrywide comes with a $1.5 trillion mortgage servicing portfolio, which produces fees for collecting mortgage payments.

Before buying Countrywide, Bank of America sent 60 people to scour Countrywide's books for potential loan losses and to study legal liabilities. Since then, the bank has continued to examine the company's portfolio and underwriting practices. On a number of occasions, Lewis has expressed confidence in what he's buying.

Countrywide made profits of $2.7 billion in 2006, but lost $704 million in 2007 as it set aside $2.3 billion to cover bad loans and mortgage volume shriveled. It lost nearly $900 million in the first quarter of this year. In January, Bank of America said the purchase would be neutral to its bottom line this year but pad earnings per share by 3 percent in 2009, not counting restructuring charges.

Analyst Nancy Bush of NAB Research in New Jersey said the bank could find itself in an enviable position when the housing market recovers. Lenders will get better terms from customers, employ better underwriting standards and find more realistic values assigned to homes.

"The ones left standing, and that have their ducks in a row, will be very profitable," she said.

Possible legal hangovers

Some analysts, however, fear that Countrywide's pitfalls could overwhelm its positives.

When the deal closes, accounting rules will require Bank of America to mark down the value of Countrywide's $200 billion balance sheet, which includes loans and mortgage-backed securities. Peters, the analyst, expects writedowns between $5 billion and $18 billion. The losses won't come out of quarterly earnings but could require the bank to raise more capital, she said. That hurts existing shareholders because it dilutes the value of their holdings.

Another problem is Countrywide's legal issues. The FBI is reportedly investigating Countrywide's lending practices. Countrywide shareholders have filed suits over the merger. The U.S. Justice Department is probing whether the lender abused borrowers and the bankruptcy process.

"They will be hit by some litigation, and a fair amount of it," said Carl Tobias, professor at University of Richmond's law school. "There's smoke, but we don't know how much fire."

Christopher Whalen, managing director of financial analysis firm Institutional Risk Analytics, said Bank of America could craft a way to separate Countrywide's banking operations and servicing portfolio from its legal liabilities and bad debts. For example, it could absorb these valuable units, while leaving the rest in a company, called Red Oak, that was created to execute the deal.

Bank of America encouraged such speculation when it said in a filing that it was evaluating what to do with about $38 billion in Countrywide's debts, saying "there is no assurance that any of such debt would be redeemed, assumed or guaranteed." That would leave Countrywide bondholders at risk of losing their investment.

One strategy could be to threaten a bankruptcy protection filing by the remaining holding company, a move that could force legal settlements, Whalen said. Lewis also could be lobbying regulators to subsidize the deal, citing the assistance provided JPMorgan Chase in buying investment bank Bear Stearns, he said.

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