The Wall Street Journal [subscription] reports that Countrywide Financial Corp. (NYSE: CFC), the country's biggest mortgage lender, just drew down its entire $11.5 billion line of credit. And Countrywide is shifting its mortgage business into its bank subsidiary since it will not be reselling many of its mortgages to investors. But these moves don't seem to be helping. Its stock fell 13% yesterday and has tumbled another 15% in the wake of this news.
Such an enormous and sudden draw down of a line of credit is not a good sign. That's because lines of credit generally charge very high rates of interest. A borrower would make such a sudden draw down only if the borrower could not get short-term funding elsewhere at a lower rate -- such as in the commercial paper market. Moreover, today's move suggests that Countrywide's short-term financing options are limited.
The market is getting nervous about Countrywide. Merrill Lynch & Co. Inc. (NYSE: MER) downgraded Countrywide shares to "sell" and the cost of protecting Countrywide's debt against default soared by 67%, indicating sharply increased concerns about its creditworthiness.
Is it still possible to sell short shares of Countrywide? It may be worth analyzing whether it could go bankrupt soon.
Update: DealBook suggests that a Countrywide bankruptcy is not so far fetched -- it argues that bankruptcy attorneys and restructuring advisors could make millions restructuring its debt. For example, the bankruptcy of insurer, Conseco generated $89 million in bankruptcy fees.
Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
8-16-2007 @ 12:21PM
mikecortez860 said...
This is an indrect fall out from all the money that has
been thrown away on Irac. After all the tax breaks for the rich and this war, all the country can do at this point is print more worthless money.
8-16-2007 @ 1:40PM
mainstreetmortg said...
you must be a communist Mike
8-17-2007 @ 9:07AM
molly said...
Check out www.eyeoncountrywide.info , an independent consumer resource examining sub-prime lending and Countrywide Financial Corporation
8-17-2007 @ 5:30PM
Bruce Fitzgerald said...
Countrywide needs to go belly up. They don't care about you,or me. They took my home equity after Katrina but they didn't get my house. I managed to sell it before they foreclosed. They did everything they possibly could to make a bad experience even worse by dragging their feet returning the insurance money. Don't ever,ever do business with these people. Get it in writing that your new mortgage won't be sold to Countrywide. You'll be so very glad you did.
8-17-2007 @ 8:36PM
Jeff Matthews said...
Well to keep in the spirt of countrywide trying to retain its market shares, it is also harrassing its customers into paying thier property taxes ahead of schedule, and trying to say that the customer is in default if they don't comply. They are trying to attach peoples Mortgages with there tax burdens to ensure the properties aren't sold for back taxes by local governements but what they are failing to realize is that they are forcing forclosures of their financial interests. Huh- what gives!
8-18-2007 @ 8:04PM
Monty said...
Since August 17th, CFC stock is up $2.48 once Feds made the announcement that is will cut rates by .50 does that mean Countrywide's problems are over?
8-20-2007 @ 3:35PM
chinablue63 said...
Countrywide is a shady outfit that deserves to fold it's tent and take it's freak show off the planet.
Crooked, evil and greedy.
8-23-2007 @ 10:13PM
aroundtheclock4 said...
4. I deal with foreclosures all day and if anyone needs help with anything go to my website.
123soldhouse.com
Also there is ways I can help people buy home without the banks go to www.anycredithouses.com
My contact info is on our sites. Alot of knowledge also
8-23-2007 @ 10:34PM
aroundtheclock4 said...
4. I deal with foreclosures all day and if anyone needs help with anything go to my website.
123soldhouse.com
Also there is ways I can help people buy home without the banks go to www.anycredithouses.com
My contact info is on our sites. Alot of knowledge also