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Bank of America's (NYSE: BAC) newly-acquired Countrywide Financial is being sued by yet another state attorney general, with Indiana's Steve Carter announcing on Sunday that he's suing the company for deceiving borrowers into loans that they could not afford and/or were not aware of the associated risks.

In a press release announcing the suit, Carter said that "These unfair lending practices may have harmed thousands of people and, in turn, negatively affected our communities and neighborhoods throughout the state." According to Carter, "The most common misrepresentations uncovered to date have been on 1) pre-payment penalty terms, and 2) the time period in which interest rates would be recalculated (resetting ARMs – adjustable rate mortgages)."

Carter is seeking penalties of up to $15,500 per violation, plus investigative costs and restitution.

Countrywide had been sued many times before the Bank of America acquisition, and BofA knew that there would be more to come. But for a deal that is widely considered to have been too expensive and too risky, the distraction and headache of all these lawsuits would seem to make this a deal Ken Lewis probably regrets. Of course, he won't say that publicly.

The U.S. Department of Justice is challenging (subscription required) a settlement Countrywide Financial reached with a Pittsburgh bankruptcy court that had alleged that Countrywide was intentionally mishandling mortgage payments it received as part of a scheme to extract large fees and penalties from struggling borrowers.

The Justice Department says that a non-disparagement clause in the settlement could "impede, impair or otherwise chill witness testimony in the U.S. Trustee's ongoing investigation of Countrywide."

The non-disparagement clause required court official and whistle blower Ronda Winnecour to agree not to "in any manner, whether directly or indirectly, disparage" Countrywide, and to assure that her employees didn't disparage the company either.

Connecticut Attorney General Richard Blumenthal has sued Bank of America's (NYSE: BAC) Countrywide Financial alleging that the company misled borrowers into taking on risky loans that they couldn't afford. California, Illinois, and Florida have filed similar charges, and it seems likely that more will follow.

Blumental said that "Countrywide conned homeowners into mortgages they simply could not afford," and wants Countrywide to amend mortgages that violated state laws and make restitution to affected borrowers. Blumenthal is also seeking fines of $100,000 per violation of state banking laws, and up to $5,000 per violation of state consumer protection laws.

CNNMoney reports that Bank of America (NYSE: BAC) reports that its earnings fell 41% in the second quarter to 72 cents a share. In response, its stock is up 11% in pre-market. Why the celebration? Analysts expected Bank of America's earnings to tumble 48% to 53 cents, so it beat those expectations by 19 cents a share.

According to CNNMoney. Bank of America's revenue was up 14.6% to $20.32 billion during the quarter due to "wider net interest margins, loan growth and higher income from mortgage banking and the company's investment and brokerage services." Thomson Reuters surveyed analysts who expected revenue of $18.37 billion -- 10% lower than its actual results.

I am wondering whether some investors will think we have bottomed out of the banking crisis. I think it's too early to break out the champagne, but the coming rally could be a good time for nervous investors to bail out. That's because credit losses could keep rising -- Bank of America added $5.8 billion to reserves for bad loans and its Countrywide purchase could boost those reserves far more in coming quarters.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

The Friends of Angelo Mozilo loan scandal widens, with Portfolio.com publishing a list of prominent people who received favorable loan terms from Countrywide Financial because they were friends of its chairman and CEO. Christopher Dodd has already been raked over the coals for the special deals he received, but there's more: former Fannie Mae CEOs James Johnson and Franklin Raines, former HUD director Henry Cisneros, CNN commentator Paul Begala, and many others. View the full list here, with 17 names and details on the terms.

It's tempting to level allegations of political corruption, and special terms given to executives at Fannie Mae and a judge who later heard a case involving Countrywide would seem to be obvious conflicts of interest. But as scandals go, this one seems pretty lame in that regard. The amounts involved just weren't that big: What's $15,000 when you're William Esrey, the former CEO of Sprint? It seems more likely that Angelo Mozilo, an incredibly vain man, wanted to be a "player" and hobnob with influential people. That he used shareholder assets to pursue his social agenda is distasteful but, unfortunately, not particularly rare. And given what a corporate governance outhouse Countrywide was, it certainly isn't surprising.

But in the current environment where Countrywide is being raked over the coals, mostly with good reason, this was destined to turn into a big mess. Read the Portfolio exposé here.

The Chapter 13 bankruptcy trustee in Pittsburgh accused Countrywide Financial, the poster child for lending practices that were disastrous for both investors and consumers (but worked out quite well for Angelo Mozilo), of losing or destroying more than $500,000 in checks between December 2005 and April 2007, and then charging already downtrodden borrowers for illegitimate late fees and legal costs.

Countrywide recently settled those allegations, and will pay $325,000. That's it. Is that a deterrent? Now that Countrywide is owned by Bank of America (NYSE: BAC), it's barely a rounding error, and certainly not something that will discourage Countrywide or other lenders from ripping people off.

Crime might not pay, but apparently it doesn't cost much either. Given the continuing flow of hugely negative publicity for Countrywide, it's hard to imagine that Bank of America isn't rethinking its plan to keep the Countrywide brand. Why would someone go a company synonymous with foreclosures, bait and switch, and corporate greed when they want a home loan?

With all the terrible press Countrywide Financial, which is now owned by Bank of America (NYSE: BAC), has gotten, it seems hard to imagine that there's more bad information to come. A former Countrywide regional vice president showed NBC internal emails where he had expressed concerns about mortgage fraud -- inflated appraisals, and employees coaching borrowers to lie about their incomes.

The vice president/whistle blower was fired -- he says it was because he refused to close bad loans, while the company says he was not performing. Interestingly, those could well be the same thing. He is now suing the company, and this will be an important lawsuit to watch for people looking to understand the mortgage crisis.

His allegations seem to fit in well with everything we know about Countrywide, and the rapid deterioration in its financial position indicates that its lending practices were, at best, sloppy.

If pretty much every other attorney general in the country was suing Countrywide Financial (NYSE: CFC), would Florida's? Apparently. Last night the Associated Press reported that Florida Attorney General Bill McCollum has sued the company for misleading and unfair trade practices.

There's no question that Countrywide is a horrible company on a multitude of levels, but there's some irony to the allegations that the company took advantage of borrowers. Take a look at the chart for the company's stock price over the past 5 years -- how much worse would it have done if they'd treated people ethically? It's a little bit like finding out that career minor leaguer Manny Alexander was a steroid user.

In some ways the beat down on Countrywide seems unfair, more of a response to general market problems than anything else. Countrywide helped people use toxic mortgages to buy homes they couldn't afford at a time when lenders were operating on the assumption that home values always went up, interest rates never did, and everything was comin' up roses. It was a happy conspiracy and, sure, Countrywide was happily working on loans that were fraudulent -- but everyone knew the subprime game was the wild west and no one cared. Towns benefited from increased property taxes and federal loan programs encouraged home buying with little money down. But with a lot of people angry about losing their homes, these lawsuits are good politics in an election year.

Angelo Mozilo, CEO of Countrywide (NYSE: CFC) may be a thug and he may get in trouble with federal authorities due to the way he ran his company. But at least he was generous.

According to The Wall Street Journal, everyone from casino employees to retired pro athletes got sweet deals. The paper writes that, Mr. Mozilo regularly lined up loans for people he met, according to several current and former Countrywide executives. Said one: "Angelo would call in and say, literally, 'My maid needs a loan.'"

Mozilo even gave a loan to the buyer of hockey player Wayne Gretsky's home.

The big open question about these mortgages is whether the people could have gotten them in the normal course of business, or was Mozilo's help necessary. He also may have made certain that his pals got below market rates.

Based on most of what has come out about Mozilo's behavior, he should probably give back those tens of millions of dollars in cash he got from stock options.

And perhaps, spend a few years in the pen.

Douglas A. McIntyre is an editor at 247wallst.com.

Minyanville's wise professor, Mark Bloudek, dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit www.minyanville.com.

I've been doing precious little in this market, but one stock I've been tracking closely is Wachovia Corp. (NYSE: WB). Why would I pay more mind to Wachovia than to other banks? Because it bought Golden West Financial in May of 2006 for $25 billion. And where did Golden West have most of its exposure? That's right, California.

Last night I was looking through the median home price data in the Multiple Listing Service (MLS) in various California cities and noticed some shocking price drops. The median home price offers in San Francisco dropped $10,000 in one week. Ditto for Orange County. In Los Angeles, the figure was a startling $13,000. I went back to check when the market topped in these areas and found that every one of them peaked in -- drum roll, please -- May of 2006.

The Wall Street Journal reports (subscription required) that "Dealings with Countrywide Financial Corp. (NYSE: CFC) are becoming a liability in political circles."

Democratic Senator Kent Conrad of North Dakota is donating $10,500 to Habitat For Humanity, in a nice gesture designed to compensate for the fact that he received a loan under special terms from Countrywide -- part of a program at the company known as F.O.A., meaning friends of Angelo Mozilo, the company's CEO.

Barack Obama advisor James Johnson resigned from the campaign after the media reported that he had received a special loan, and Senator Chris Dodd has come under fire for something similar.

Political corruption is one thing and, as political corruption goes, this hardly seems worth noting, especially in the current climate. But it hasn't gotten any attention as a corporate governance matter, and it should. Angelo Mozilo was paid hundreds of millions of dollars to run Countrywide Financial and he appears to have used shareholder assets to give special deals to his friends. If he wanted to give gifts to friends, he should have done it with his money.

Is it material? No, probably not. It's just more evidence of the fact that Angelo Mozilo ran the company as a personal fiefdom -- the opposite of the way a public company should be run, but not much different from the way most probably are.

TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.

AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.

They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.

Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.

In January, Bank of America (NYSE: BAC) made a gutsy move when it decided to purchase Countrywide Financial (NYSE: CFC). True, it would greatly expand its mortgage footprint, but it would also mean taking on lots of risk.

Of course, since then, the financials went into a swoon. In fact, the US financial system almost imploded because of the Bear Stearns (NYSE: BSC) debacle.

As a result, there is much skepticism that Bank of America will close its deal, as evident by remarks from an analyst with Friedman, Billings, Ramsey & Co. – Paul Miller – who thinks that Bank of America should forgo the deal.

His belief is that there will be a need for a whopping $30 billion writedown, which would be tough to swallow for Bank of America's shareholders.

Interestingly enough, there are already signs that Bank of America is getting skittish. Last week, the firm was not clear that it would back Countrywide's debt. The upshot was that S&P downgraded the debt to junk status.

And yes, in today's trading, Countrywide's stock is down 10% to $5.35.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Countrywide Financial (NYSE: CFC) is recently up 14 cents to $6.28.

CFC has been recently subject to unconfirmed chatter Bill Miller of Legg Mason Value Trust and other major CFC shareholders want Bank of America (NYSE: BAC) to increase its offer for CFC.

BAC announced on Jan. 11, 2008 it will pay CFC shareholders 0.1822 per share of BAC for each share they own. The BAC buyout premium spread is wide at 22% ($7.46).

CFC May option implied volatility of 74 is near its 12-week average of 77 according to Track Data, suggesting non-directional risk.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

If you can make money lending money to people who can't afford mortgages, why not make money buying them back. Several former Countrywide (NYSE: CFC) managers have linked up with Blackrock (NYSE: BLK) to set up a firm, Private National Mortgage Acceptance Company, to buy troubled mortgages. According to The Wall Street Journal the new operation "seeks to raise more than $2 billion to buy distressed mortgages on the cheap, work with borrowers to restructure them, and then resell them as performing mortgages at a profit."

The new venture stinks a bit. The people running the venture learned the business at Countrywide, the source of so much of the pain in the current mortgage crisis and the project makes Blackrock appear to be a firm ready to profit from the misfortune of others. Beyond that, the new company seems like a real money-maker.

The Blackrock-supported mortgage-buying operation will have to be careful when it enters the market. If it buys big packages of home loans and the market keeps falling, the start-up could lose a lot of money. Let's hope so.

Douglas A. McIntyre is an editor at 247wallst.com.