Countrywide Shares Tank on Merrill Downgrade

Shares of market-leading mortgage lender Countrywide Financial fell 13% to close at $21.29 Wednesday, their worst drop since the crash of 1987, after an analyst at Merrill Lynch said he believed the lender could face bankruptcy. Kenneth Bruce downgraded Countrywide to Sell two days after publishing a note rating the stock a Buy. In the downgrade, he wrote that "effective insolvency" would result if Countrywide is forced by creditors to liquidate its assets. More than 70 lenders have either pursued buyouts or shut down since the beginning of last year as banks have shown increasing reluctance to lend and have demanded more collateral. Countrywide's shares have lost half their value this year. The price of Countrywide's five-year credit default swaps rose 225 basis points to 600 basis points on Wednesday, suggesting that doubts are rising about the company's solvency (CDS prices rise together with the perceived risk of owning a company's bonds). Countrywide provides funding for almost one in five U.S. home loans. Specialty finance company KKR Financial Holdings, which reported that it had lost $40 million on the sale of $5.1 billion of mortgage loans, plummeted 31% to $10.52 on Wednesday. Scottish Re fell 24% to $2.79 on news it is reviewing risks in its $3.1 billion of bond holdings backed by subprime and Alt-A mortgages.

Sources: Bloomberg, MarketWatch, Wall Street Journal
Commentary: Countrywide Financial, VTB Group: Why Are Analysts So Screwy About Sells? • Countrywide Financial Plummets On 'Unprecedented Disruptions' In Secondary Mortgage Market • As Countrywide Financial Goes, So Goes the Mortgage Sector
Stocks/ETFs to watch: CFC. Competitors: BAC, WFC
Earnings call transcripts: Q2 2007

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