It’s pretty clear that if Bank of America does not go through with the purchase, Countrywide is insolvent, and it gets shut down, because it is, by any standard, insolvent without a white knight of some kind.

Nouriel Roubini considers this to be a distinct possibility:

The views of Whalen are – based on a survey I made of banking experts – shared by most bank analysts. On May 2nd S&P cut Countrywide’s rating to junk; while on May 5th a number of analysts recommended that BAC walk away from this lousy deal. BAC is already sitting on a potential loss of about $1.3bn from its initial $2bn stake in CFC but as one analyst put it: “I hope Bank of America isn’t throwing good money after bad”.

Thus he raises the question as to what exactly such a collapse might mean, given that Countrywide has originated nearly 1/5 of the mortgages in the US in recent years.

He takes a look at the bigger picture:

Of course the bust of CFC is only a symptom of a much bigger systemic banking problem in the US: with 47% of the assets of all large US banks being related to real estate (residential, commercial, etc.) and with 67% of assets of smaller banks being related to real estate hundreds of smaller community banks and dozens of regional banks and a few national banks will be bankrupt in the likely scenario that home prices fall at least 20% (they are already down 14.7% from peak based on the Case and Shiller/S&P Index) and possibly as much as 30% by the time they bottom out in 2009-2010.

That’s hundreds of banks, some of them of a fairly significant size, that end up liquidated and under FDIC stewardship.

If he is 10% right, then we aren’t even half way through the down slope on this thing.