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Bankruptcy Rumors At Countrywide


Countrywide claims to have "ample liquidity" and "sufficient contingent liquidity" while pointing out a downgrade could limit access to credit markets.


Shares of Countrywide Financial (CFC) went on a wild ride Tuesday over bankruptcy and liquidity rumors:

Countrywide Financial Corp shares plummeted as much as 22 percent on Tuesday on speculation the largest U.S. mortgage lender might run short of cash, but recovered most of that loss after the company said it has ample liquidity and will not go bankrupt. In a statement late on Tuesday, Countrywide said it believes it has "ample liquidity and capital" to ride out the U.S. housing downturn, and will benefit from mortgage market consolidation.

"Nobody's got any faith in anyone telling the truth, or knowing what the truth is," said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York.

My comment: Lack of faith sure sums it up. Furthermore, there is absolutely no reason anyone should have faith.

Countrywide said it had $35.4 billion of "highly reliable liquidity" on Oct. 31 and that its bank unit has "sufficient contingent liquidity" to cope with changing markets. It also said its Countrywide Home Loans unit will not need to sell debt to replace maturing debt until "beyond 2008."

My comment: Countrywide gave away options on 1/6 of the company to Bank of America (BAC) for $2 bln in one breath while claiming $35.4 bln of "highly reliable liquidity" in the next. This picture does not add up.

Late Monday, Moody's Investors Service affirmed Countrywide's "Baa3" debt rating, its lowest investment grade, with a "negative" outlook. Countrywide had on Nov. 9 said a downgrade to "junk" status could limit access to credit markets and hurt its business.

My comment: Once again Countrywide's statements do not seem to add up. It claims to have "ample liquidity" and "sufficient contingent liquidity" while pointing out a downgrade could limit access to credit markets. Which story are we supposed to believe? Is $34 billion in reliable liquidity contingent on Countrywide maintaining its investment credit rating, by any chance?

Credit default swaps on Countrywide Home Loans Inc rose 150 basis points to 900 basis points, or $900,000 per year for five years to insure $10 million of debt, according to data from Phoenix Partners Group.

My comment: The swaps market does not believe Countrywide has "ample liquidity," so why should I?

The Freeze Is On In California

Arnold Schwarzenegger announced a deal Tuesday with Countrywide Financial Corp. (CFC), GMAC (GMA), Litton Loan Servicing LP and HomeEq Servicing Corp that will allow their mortgage borrowers in California to continue paying loans at initial rates if they live in their homes and make payments on time but are unlikely to afford higher payments when their mortgage interest rates reset.

Countrywide clearly sees bleeding capital in unprofitable loans as a better option than foreclosures and the resultant REO problem.

However, Freezing Mortgage Rates Will Fail, just as every wage or price fixing control in history has failed. I view this as an act of desperation by Countrywide, GMAC, Litton, and HomeEq. This deal will backfire sooner rather than later, just as Paulson's Citigroup SIV solution did.

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