In an apparent effort to save the largest U.S. mortgage lender, Bank of America (BOA) announced it intends to purchase Countywide Financial for $4 billion.

This is in addition to the $2 billion it "invested" in preferred stock of Countywide back in August 2007.

Under the shadow of the dark clouds now passing over the residential property market, our readers may wonder why our nation's second-largest bank would be taking on even more real estate risk considering that Countrywide's share value on Sept. 30 was an estimated six times less than it was a year ago.

The mortgage lender also reported earlier this month that the foreclosure rate among the 9 million mortgages for which it collects and processes payments doubled to 1.44 percent from a year earlier.

I now suggest an answer.

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Bank of America CEO Ken Lewis and his board appear to feel that it would be good strategy both to protect their initial investment and to buy a market leadership position, ready to cash in when the residential real estate mortgage market recovers, particularly if the taxpayer ends up paying a large part of the bill.

Last week, we published a Financial Intelligence Report item titled "A Glimmer of Light for Subprime Loans." In it, we pointed out some of the reasons high-risk investors might see potential long-term profits in mortgage-backed securities.

BOA's intended purchase of Countywide may likewise be risky. But, if successful, it will not only salvage its prior, $2 billion "investment," but will, at a stroke, make Bank of America the largest mortgage lender in the United States.

However, our readers may still wonder why Lewis would bid on Countywide, a lender that last week appeared to be on the verge of bankruptcy?

Well, the protection of a prior investment is a key element of business school "game theory."

Indeed, there is a classic case study entitled about J.I. Case, the real-life story of the massive manufacturer of agricultural equipment, renowned amongst ranchers, farmers and gardeners.

The main point of the Case problem was of a major institution borrowing excessively from its banks when times appeared good. J.I. Case borrowed massively to finance a roaring sales expansion.

However, executives both at Case and at its lending bankers were slow to notice that the price of increased sales and capture of market share, by means of discounts piled onto aggressive pricing, had created a serious erosion of profit margins. In short, Case was "over trading" at an increasingly unprofitable rate.

Luckily for Case, its bankers were even slower than its own corporate executives to see the threat to the financial viability of their "successful" local client.

Eventually however, some of the bankers started to ask questions and to undertake comprehensive reviews of the mounting risks of lending to their "prestigious" client and moved to call in their loans. But it was too late!

After tough negotiations, it gradually dawned upon the bankers that their loans to Case were so massive that Case was no longer banking with them; rather, as they say, the bankers were now banking with Case!

In short, to protect their outstanding loans, the bankers had to extend yet further credit to Case.

I believe a similar decision now faces the board of BOA.

Many readers doubt the wisdom of pouring good money after bad. I would agree, if that were the complete picture facing BOA. It is not. Indeed, there are four other important considerations facing the BOA board.

As the shares of Countywide and the mortgage industry have been smashed downwards of late, BOA faces a very significant buying opportunity.

The first Baron Rothschild is alleged to have said, "Buy when there is blood in the street." In a recession, of course, the financial blood will flow in different streets at differing stages of an economic downturn.

So far, we have seen residential construction. Now it's the turn of "supporting" industries such as mortgage lending and soon perhaps, municipal bond insurance companies. (For good reason we praised Warren Buffet's recent decision to enter that industry.)

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I see five reasons for BOA to buy now.

First, there is already blood on the mortgage-lending street.

Second, the share price of Countrywide represents a historically cheap opportunity for BOA to buy into a position of national leadership in American mortgage lending in a single transaction, with many trained staff in place.

Countywide, with its household name; some 9 million clients; and the fees on some $1.5 trillion of mortgages represents a rare opportunity upon which to capitalize — when the residential market eventually recovers.

To seize and sustain such an opportunity will take very deep pockets in the near term. BOA is highly profitable and has such pockets.

Third, if the plan works out, it represents a good opportunity to protect their August 2007 investment of $2 billion.

Of course, there are some who may doubt that things will work out. These doubts are serious.

One has only to remember Yale Professor Robert Shiller, quoted recently by Bloomberg saying "There is a tendency for people to under-appreciate the risk of the housing market." He added more ominously that, "When people see their houses are worth less than mortgage balance, there is an incentive to default."

I have debated with Professor Shiller on CNBC's Larry Kudlow show and I hold him in the highest of respect. His words should encourage the strongest of due-diligence by BOA.

Assuming (and this is admittedly a risk!) that the real estate experts at BOA have done their job of analyzing the true magnitude not just of the actual losses, but of the potential losses at Countrywide, then the BOA bid makes good sense, on the surface.

But what about those factors under the surface?

Well, that draws me to my fourth good reason for the BOA bid — taxation!

The U.S. taxpayer could end up paying for a considerable part of BOA's bill!

More specifically, as Fortune recently reported in an excellent article, BOA would be entitled to offset some $100 million a year, for five years, or $500 million against its own, solid earnings.

Thereafter, it appears that, if the losses at Countywide exceed $ 1.35 billion, BOA will be entitled to write them off, without limitation, from the sixth year onwards.

So there are very considerable tax advantages, savings that could go a long way towards reducing BOA's actual cost to near zero in after-tax dollars! But that depends upon the future and therefore represents another element of risk.

Finally, the housing crisis is now so big that it is fast becoming a political "hot potato," especially in an election year.

Politics is about perceptions. So, I expect that any individual (like Warren Buffett, for instance) or corporation who appears to help solve or camouflage immediate and acutely embarrassing political problems, can expect political "goodwill" down the road.

It is possible that BOA, with Countrywide's client list, could run up against anti-trust regulations in some states. My guess would be that the regulators will show BOA quite remarkable tolerance in this respect for many years!

So, the decision of Ken Lewis and his board at BOA does indeed look decidedly risky, at first glance.

But great leaders (such as Horatio Nelson and Robert E. Lee) took very audacious but calculated risks to achieve stunning performance with their assets. Interestingly, the motto of the legendary British SAS (Special Air Service—the father of all special forces) is: "Who Dares Wins."

As a former soldier myself, I am tempted to see BOA's decision as daring but calculated and, potentially, stunningly rewarding.

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