Countrywide May Go Bankrupt, Says Merrill Lynch

Eight words from Merrill Lynch - “it is possible for Countrywide to go bankrupt” – shook Wall Street and plunged company shares 13% after one of their analysts downgraded the nation’s top residential lender from “buy” to “sell,” citing liquidity troubles that may ultimately topple the mortgage giant.It was the fifth consecutive day of declines on the New York Stock Exchange (NYSE) when Merrill Lynch analyst, Kenneth Bruce, wrote in a research note that creditors could push Countrywide into “effective insolvency.”One day earlier, Countrywide reported foreclosures at 5.10% and pending foreclosures at 0.79%, the highest levels in years.The poor performance of the loans could bring enough concern to creditors, already shaken by the deterioration of the mortgage-backed securities market, to force Countrywide into a credit crunch."If enough financial pressure is placed on Countrywide, or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency," wrote Bruce, who was responsible for the downgrade."If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt."Bruce urged shareholders not to “understate the importance of liquidity.”Shares of the Calabasas, California-based company dropped to a four-year low of $19.25 before ending the day at $21.29, a drop of 12.96%. Countrywide stock has declined 42% this year.Five-year credit swaps of Countrywide, an indication of the perceived risk of owning the company’s bonds, increased up to 100 basis points to 500 basis points, according to traders.Last week, Countrywide indicated that it had access to $186.5 billion of cash at the end of the second quarter, including $46.2 billion of "highly reliable" short-term financing.In his research note, Bruce remained optimistic about Countrywide’s prospects.“We continue to think the company can survive a period of secondary market instability,” wrote Bruce. “However, the steps that it would take to preserve shareholder value would be expensive, likely leading to further share price declines from here.”Posted on Thursday, August 16, 2007 by staff