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Shares of Countrywide Financial were up 16% in pre-market trading Thursday after Bank of America announced late Wednesday it has taken a $2 billion equity stake in the troubled mortgage lender. Countrywide finances about one of every CFCC 23 08 2007 Chartsix mortgages in the U.S. The announcement followed news that Lehman Brothers is shutting down a subprime lending business (full summary) and the closure by Capital One Financial of its GreenPoint mortgage unit (full summary). BofA invested in Countrywide's nonvoting convertible preferred stock, yielding 7.25% annually, which can be converted to common stock at $18 a share, 17.5% below Wednesday's close. If it converts its entire holding, BofA will hold 16-17% of Countrywide's common stock. Countrywide was caught off guard last week as the market for commercial paper dried up, forcing it to tap its entire $11.5 billion credit line from a syndicate of 40 banks. "In the current turmoil, the stock market has been underestimating the value in Countrywide's operations and assets," said BofA CEO Kenneth Lewis. "We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets." Morningstar analyst Ganesh Rathnam speculates that BofA might have its eye on a bigger prize. "Eventually I think they'd be looking to acquire the whole firm," he said. "I don't see why they would otherwise buy $2 billion into it." BofA will presumably become Countrywide's preferred lender, analysts said. Many also thought the move may signal healing in the battered mortgage lending market: "With last week's Fed action and today's announcement, it appears that the mortgage capital markets will return to more normal levels of activity and liquidity sooner than we thought,'' Fox-Pitt Kelton Inc. analyst Howard Shapiro wrote in a note to investors Wednesday. Other mortgage lenders jumped in AH trading: Thornburg Mortgage Inc. gained 10% percent, IndyMac was up 7%, and Accredited rose almost 9%.

Sources: Press release, Wall Street Journal, Reuters, MarketWatch, Bloomberg
Commentary: A Very Short Act In One Play: How Bank of America Decided To Save CFCBank of America Invests $2B in Countrywide: Who Wins?Capital One Slams Door on GreenPoint Mortgage
Stocks/ETFs to watch: BAC, CFC, TMA, IMB, LEND. ETFs: RKH, KBE, FDL
Earnings call transcripts: Countrywide Financial Q2 2007, Bank of America Q2 2007

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