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Bankruptcy Rumor Crashes Countrywide

Written By Brian Hicks

Posted January 8, 2008




"There are a terrible lot of lies going about the world,
and the worst of it is that half of them are true."
Winston Churchill


It’s been another tough day for Angelo Mozilo and the company he loves to sell, Countrywide Financial (NYSE:CFC).

Shares of the nation’s largest mortgage lender were halted earlier today as the rumors of their demise began to circulate around the Street.

Of course, those rumors–Countrywide said–were entirely unfounded.

"There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company," Countrywide said in a statement.

But that denial didn’t stop the stampede for the exits as shares of the company fell by 26% in intraday trade.

In short, Mozilo & Co. fell off of the proverbial cliff before rebounding a bit.


Here’s the story from Bloomberg by Jeff Kearns and Lynn Thomasson entitled: Countrywide Loses Most Since 1987 on Bankruptcy Bets.

"Countrywide Financial Corp. dropped the most in two decades on the New York Stock Exchange amid speculation the largest U.S. mortgage lender will file for bankruptcy.

“The rumor was they would file for Chapter 11 this week,” said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York. “That spooked all the financials.”

Investors drove Countrywide shares down 79 percent last year on concern the lender was suffering from a cash shortage. The company tapped emergency credit lines and got a bailout from Bank of America Corp. as the worst housing slump in 16 years fueled bets that Countrywide might seek bankruptcy court protection.

“There’s some sort of rumor that they would go under, but it’s purely a rumor,” said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $50 billion in Santa Fe, New Mexico.

Credit-default swaps tied to Countrywide’s debt soared to a record as investors demanded 30 percent upfront and 5 percent a year to protect from a Countrywide default for five years, according to broker Phoenix Partners Group in New York.

Yesterday, investors were demanding 20 percent upfront and 5 percent a year. Contracts trade on upfront payments when the market sees a high risk of default.

Options traders increased bets that the stock will slide as much as 67 percent from yesterday’s close before this month’s contracts expire on Jan. 18. The number of put options traded rose to 147,221, almost four times the 20-day average, and bearish bets outnumbered bullish ones, or calls, by more than 2- to-1.

The most-active contracts, January $5 puts, surged more than sixfold to 65 cents. January $2.50 puts, the third-most traded, rose sixfold to 20 cents.

“That’s panic buying in options,” said Peter Dunay, who oversees $160 million including options as chief investment strategist at Leeb Capital Management in New York. “People are definitely speculating that Countrywide could be going much lower.”

But it wasn’t just Countrywide that got hammered in the wake of those whispers.

The Financial Select Sector SPDR ETF (NASDAQ:XLF) also plummeted.

Of course, that does make you really wonder what would have happened to the financials if those whispers actually turned out to be true today.

Because let’s face it, Churchill in this case is probably right–half of these rumors probably are true.

One day soon  a pretty big shoe is going to drop. That much at least is true.

UPDATE: That bounce didn’t last for long as Counrtywide and the broader markets fell into today’s close.

Here’s the chart: