SAN FRANCISCO (MarketWatch) — At the end of the second quarter of 2008, Bank of America Corp. was on a roll.

Chief Executive Ken Lewis had announced a deal to buy Countrywide Financial in a fire-sale deal for $4.1 billion, an acquisition that had the potential to make the bank the biggest lender in the nation. B. of A. BAC, -0.97% reported a profit of $3.7 billion, and revenue was a record $20.3 billion.

Former Bank of America CEO Ken Lewis Getty Images

“We are pleased with these solid results in a difficult financial environment,” Lewis said in a statement, adding “our operating results were quite good virtually across all business segments.”

But little did Lewis know, among the 208,587 employees at the bank, there was a rat.

In the year leading up to his proud statement, somewhere inside the bank’s mortgage securities division, a B. of A. credit analyst had been seeking to scuttle one of the bank’s hugely profitable deals. B. of A. was seeking to sell $850 million in residential mortgage-backed securities to investors including Wachovia Corp. and the Federal Home Loan Bank of San Francisco.

As the bank readied the deal, which it planned to tout as a package of creditworthy, prime jumbo mortgages, the rat went into action. He or she, identified in court documents only as a bank securities trader, attempted to thwart the deal as planned by notifying the underwriting team there were toxic loans in the pool.

“I combed through these loans one by one,” the employee wrote in an email to a colleague. “None of these loans are suitable for a prime jumbo A-Credit securitization. The combination of stated docs, high combined LTV’s [loan to value ratios], exception underwriting make these loans very much alternative underwriting. Therefore, I am not comfortable adding them to the pool.”

These concerns were ignored.

It’s safe to say this rat wasn’t interested in “solid results in a difficult financial environment.” And another B. of A. banker — who seemed to fancy him or herself a team player — had some advice for the rat: “keep her opinions to herself.”

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And there was more. In another email, the rat, or possibly a different rat, argued that some of the loans weren’t as sound as the bank was marketing them to be.

“Like a fat kid in dodgeball, these need to stay on the sidelines,” he wrote.

Little did most of us know that B. of A. was about to lose its own game of dodgeball. The Countrywide deal was a disaster, hanging tens of billions of dollars in legal liability on the bank. B. of A.’s deal for Merrill Lynch later that year was nearly as troubled. And not long after the rat’s deal was sold, B. of A. couldn’t sell anymore. The risky loans went bad. The bank needed an unprecedented bailout of $45 billion from taxpayers.

While that history is well known to us now, the tale of the rat (or rats) at Bank of America was, until recently, mostly unknown. The story was told in a 73-page civil lawsuit against the bank filed Aug. 6 in U.S. District Court in Charlotte, N.C. The Justice Department is seeking unspecified damages against the bank for the deal.

B. of A., of course, is bringing out the old “sophisticated investor” defense.

“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” said spokesman Lawrence Grayson, in a statement.

In other words, B. of A. is making the case that investors in the RMBS in question should have had their own rats.

The bigger question, of course, is why are responsible bankers treated as rats? This is hardly the first instance in which those responsible for vetting products had doubts. Even the recent case that led to the conviction of Goldman Sachs Group Inc. banker Fabrice Tourre illustrated that Tourre himself knew the dubious nature of the products he was selling.

No doubt that in the B. of A. case, the bank’s legal team is chagrined that the rats actually put their concerns in writing. In doing so, their concerns are a liability to the bank. The rats, these lawyers might muse, have brought a plague of lawsuits that will cost the bank potentially billions.

The irony, of course, is that these rats actually were working to save the institution from costly missteps. Rather than carrying an infection, they were the immune system that was fighting an infection, and they were simply overwhelmed.

Or, to put it another way, they were treated like the fat kids in a game of dodgeball.

The underlying problem illustrated in the Justice Department’s case against B. of A. isn’t the sale of a bad mortgage products to investors. It’s that the scrupulous bankers are clearly shunned by a cowboy investment-banking culture that has permeated our deposit-taking institutions. Old-fashioned risk management doesn’t lead to “solid results in a difficult financial environment.”

That’s why separating brokerage and banking through a return of the Glass-Steagall Act is more than just the combination of financial products. It's about keeping cultures pure — risk management at banks versus risk-taking at investment banks. Both are important to a financial system, but they need their own cultural space.

After all, rats only seem dirty when they’re out of their habitat.