Shortly before buying Countrywide Financial three years ago for $2.5 billion, Bank of America chief executive Ken Lewis admitted there was risk in the deal. But he added: "We are not paying $22 billion either."

Turns out it was a lot more.

Last week, the bank announced it will take $20.6 billion in mostly pretax charges for mortgage-related issues. That comes on top of $15.9 billion in mortgage losses already taken since July 2008. Many of the losses are tied to investor requests for the bank to buy back soured loans Countrywide sold off during the housing boom.

"You have to put it down as one of the worst (deals) in history," said Gary Townsend, chief executive of Hill-Townsend Capital, a Maryland-based investment firm.

Bank of America said it has now addressed a big chunk of its investor claims, but it estimates it will still absorb an additional $5 billion in losses, including more related to Countrywide, along with additional legal expenses. Bank of America also continues to work through a mound of loan modifications and foreclosures for struggling borrowers.

And the bank's projections could prove too optimistic if housing prices continue to slide.

In announcing the losses last week, chief executive Brian Moynihan is making a bold bet that he can put the bank's Countrywide problems behind it, instead of fighting a protracted war with investors. Analysts and shareholders are eager for the bank to start generating more revenue, building capital and paying a more substantial dividend.

Bank of America became a national giant by gobbling up rivals through a series of mergers in the last three decades under Lewis and predecessor Hugh McColl Jr. But the bank's strategy of snapping up struggling companies backfired when it bought Countrywide and Merrill Lynch in the latest financial crisis.

In fact, both of Charlotte's big banks were walloped by disastrous mortgage acquisitions. Wachovia's 2006 purchase of Golden West Financial, Townsend said, was worse because it contributed to the bank's near collapse and led to its eventual sale to Wells Fargo in 2008. But Countrywide, in combination with the 2009 Merrill Lynch purchase, pushed Bank of America "pretty close" to the edge, he said.

Although Golden West's loans were devastating for Wachovia, they have been less trouble for Wells Fargo. That's because, under accounting rules, the San Francisco-based bank was able to write down the value of the $122 billion portfolio at the time of the merger. The loans also weren't packaged into bonds, so the loans aren't spurring costly investor requests to buy them back.

Bank of America's Countrywide involvement began with a $2 billion investment in the tottering lender in August 2007. Countrywide had long been a Bank of America customer, and Lewis flew to California to personally seal the deal with its CEO, Angelo Mozilo. Lewis won praise for a market-soothing move that had the potential to earn Bank of America lucrative dividend payments.

Bank of America initially denied interest in an outright acquisition, but by January 2008, Lewis had agreed to buy the whole company, concluding a campaign to become No. 1 in major consumer banking businesses, from bank deposits to credit cards to mortgages.

"We view this as a one-time opportunity to acquire the best mortgage platform in the business at a time when the value is very attractive," Lewis said during the conference call announcing the deal.

In the same conference call, Joe Price, who was Bank of America's chief financial officer at the time, said the due diligence on the deal was "extensive." A team of 60 people had looked at the credit, legal and other aspects of the deal for about a month, he said.

"The results of our due diligence support our overall valuation and pricing of the transaction," said Price, who is now head of Bank of America's consumer banking unit.

Lewis declined to comment last week through his attorney. He has kept a low profile since he retired at the end of 2009 with at least $70 million in pension benefits, stock and other compensation. He and his wife, Donna, are listing their SouthPark home for sale at a price of $3.85 million, down from $4.5 million at the beginning of last year. They have bought another residence in Myers Park with a tax value of $1.5 million, according to property records.

In an interview with the Financial Crisis Inquiry Commission last fall, Lewis said regulators were "interested" in the bank's possible acquisition of Countrywide "but no one asked us to do the deal."

When it agreed to sell, Countrywide's board faced mounting concerns about the lender's falling stock price, ability to get credit and the potential loss of deposits, according to a securities filing. That has raised the question of whether Lewis moved too quickly.

"It was never clear why (Bank of America) didn't wait for Countrywide to go into bankruptcy and acquire all of its assets and hire its people," said Jon Finger, whose family's investment firm in Houston owns 1.1 million Bank of America shares and who has been critical of the bank's Countrywide and Merrill Lynch deals.

Bank of America spokesman Jerry Dubrowski said the acquisition helped prevent a much bigger crisis in the housing market. "If Countrywide had slipped into bankruptcy, millions of customers would have been left with little or no recourse to modify their mortgage payments and stay in their homes," he said.

Cleaning up the mess

Moynihan, who was head of investment banking at the time of the purchase, has acknowledged the bank took on Countrywide's troubled loans just when it "shouldn't have done it." And he's made it clear that the bank is aggressively working to clean up the mess.

With three major settlements in the past six months, Bank of America has made significant progress in addressing its mortgage problems, especially considering the $2 trillion size of the Countrywide portfolio, Dubrowski said.

"What remains is a much smaller portion of risk for us," he said.

The latest agreement, however, comes with a huge cost. When the bank announces second-quarter earnings this month, it will post a net loss of up to $9.1 billion, wiping out three years' worth of net income.

In a report last week, analysts at research firm CreditSights said the settlement "substantially reduces the company's mortgage overhang," but noted the company continues to face a myriad of other mortgage-related issues. That includes a potential settlement related to improper handling of foreclosures that could cost the bank billions and the possibility of more losses on home-equity loans, a portfolio that mostly has Bank of America roots.

Analysts also wonder if Bank of America will need to raise more capital to absorb its mortgage losses and to meet new international capital standards. In a research note, analyst Paul Miller of FBR Capital Markets said Bank of America would have been "best served" if it had announced a $10 billion to $15 billion capital raise along with its settlement.

Raising capital is damaging to existing shareholders because it dilutes current holdings. Already, the bank's shares are down more than 70 percent since the Countrywide deal was announced in January 2008. They closed Friday at $11.09, their first time above $11 since June 3. The bank's quarterly dividend has remained at a penny per share since it was slashed in the financial crisis, even as other large banks have won regulatory permission to hike their payouts.

The Countrywide and Merrill deals have permanently destroyed shareholder value, said Finger, the bank investor.

"The original Bank of America shareholders will never have the same earnings per share or dividends per share that they previously had," he said.

The latest settlement is positive because it allows investors to quantify the remaining risk, Finger said, but he expects more losses lie ahead.

"Management has consistently underestimated the level of mortgage losses," he said.

In a conference call with analysts, Moynihan said that nothing the bank announced last week "causes us to raise capital." He put a positive spin on the bank's effort to recover from a deal that still haunts it three years later.

"There's still work to do," Moynihan said, "but this is a major step forward for the company."