The 5 Dumbest Things on Wall Street: May 9

3. No Country for BofA

Ask not what Bank of America (BAC Quote) can do for its shareholders. Ask what BofA can do for America.

For the company's shareholders, time is running out to convince management not to buy Countrywide Financial (CFC Quote), the housing bubble's version of Enron.

BofA signaled this week that it will plow ahead with the deal, despite burgeoning signs of continued losses at the mortgage giant and legal troubles as well.

BofA's shareholders got a glimmer of hope when their company revealed in a regulatory filing that it wouldn't commit to guaranteeing Countrywide's debt. This led Standard & Poor's to cut Countrywide's credit ratings, citing the uncertain status of its creditors.

That prompted a chorus of equity analysts to advise BofA to wriggle out of the star-crossed engagement.

Last week's earnings report from Countrywide demonstrated clearly that the carnage of the mortgage debacle is spreading far beyond the subprime category. In its portfolio of option adjustable-rate mortgages, known as option ARMs and classified as prime loans, 9.4% were at least 90 days overdue, up from 1% a year before.

Option ARMs give borrowers the option during the first few years of the loan of making minimal payments, covering no principal and even less interest. Choosing that option means the loan balance increases, and eventually borrowers face a spike in monthly payments. Many borrowers took on those loans with the intention of refinancing before their payments go up, but now that home prices are in decline, that option is no longer feasible.

Meanwhile, this week's hearing before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts provided a whiff of the legal troubles that may be in store for Countrywide amid ongoing probes from the Justice Department and elsewhere. The company was accused of inflating and inventing fees to charge mortgage borrowers in bankruptcy court, with what Sen. Chuck Schumer (D., N.Y.) called a "vulture mentality."

Steve Bailey, chief executive for loan administration at Countrywide, admitted that the company had made some mistakes, but he said the practices in question were never intentional. He claimed that such mistakes were identified at only 1%, or 650, of the 65,000 cases Countrywide has in bankruptcy.

Schumer noted that in the Western District of Pennsylvania alone, 300 cases have been identified involving trouble with Countrywide.

"If there's 300 potential cases in Pittsburgh, it's hard to believe there are only 650 nationwide," said Schumer.

The senator went on to raise questions about BofA's decision to buy Countrywide.

"I've always wondered why Bank of America -- a fine institution with a good reputation -- was willing to purchase Countrywide, given its recent history, and I understand that there has been encouragement by the financial regulators to make this transaction happen," said Schumer. "These latest revelations should make Bank of America think even harder about how they want to proceed with the deal."

Dumb-o-meter score: 85. Something tells us that Countrywide officials will be headed back to Capitol Hill soon.