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Wednesday, January 9, 2008

Countrywide and Bankruptcy Rumours

Yesterday was dominated by Countrywide bankruptcy rumours and by AT&T announcing ‘softness’ in their consumer section. Let’s see what today brings.

Countrywide Loses Most Since 1987 on Funding Concern (Update5): “Countrywide Financial Corp. dropped the most since Black Monday in October 1987 in New York trading on speculation that it needs cash to continue operating its mortgage business.

Investors drove Countrywide shares down 79 percent last year on concern the company 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.

Bank of America, the nation's second largest bank, invested $2 billion in Countrywide in August. The preferred shares it acquired can be converted into common stock at $18 each and pay a 7.25 percent dividend, according to a regulatory filing at the time. Based on Countrywide's share price today, Bank of America's investment has lost 70 percent of its value. That excludes a $36.25 million quarterly dividend the lender was obligated to pay Bank of America, regulatory filings show.”

Well, the consequences of Countrywide’s bankruptcy would indeed be serious and far reaching. The absence of the largest provider of residential mortgages in the US would leave one massive gaping hole.

These rumours of bankruptcy are probably premature. That’s not to say it won’t happen…

As an aside, the $2 billion investment by Bank of America is now worth 70% less. I would not want to be the guy responsible for that decision…

Countrywide Says Mortgage Loans in December Exceeded Forecasts: “Countrywide Financial Corp., the biggest U.S. mortgage lender, said home loans in December were a better-than-forecast $24 billion.

“Our fourth quarter ended with a number of positive operational trends,” President and Chief Operating Officer David Sambol said today in a statement the Calabasas, California-based company distributed through PR Newswire.”

That’s actually pretty solid.

AT&T Drops Most in 5 Years on Consumer `Softness' (Update2): “AT&T Inc. dropped the most in almost five years in New York trading after Chief Executive Officer Randall Stephenson said slowing economic growth led to ``softness'' in the home phone and Internet businesses.

The shares fell 4.6 percent, helping to spark a broader decline in U.S. stocks, after Stephenson said AT&T is disconnecting more home-phone and high-speed Internet customers for failing to pay their bills.”

This is a direct consequence of the jump in foreclosures.

“The disconnects in the home-phone business, which accounts for about a fifth of sales, have put more pressure on Stephenson, who became CEO in June. Last year, he relied on the popularity of wireless handsets such as Apple Inc.'s iPhone to fuel growth, helping to make up for losses of home-phone customers.

AT&T lost 468,000 primary home-phone lines in the three months ended in September, Stephenson's first full quarter since taking the CEO job. The company ended the third quarter with about 32 million primary residential phone lines, a 3.9 percent decline from a year earlier.”

Basically it was the CFC rumours and the AT&T announcement that unleashed the sellers yesterday.

CDO Sales Fall First Time in Three Years, Morgan Stanley Says: “Sales of collateralized debt obligations fell for the first time in three years as surging U.S. subprime mortgage defaults prompted investors to buy only the safest debt, according to Morgan Stanley.

CDO sales fell 10 percent to $453 billion in 2007 from a year earlier, Morgan Stanley analysts, including New York-based Vishwanath Tirupattur, wrote in a report published yesterday. This is the first time issuance of the securities, which repackage assets such as mortgage bonds and buyout loans, declined since 2003, the analysts said.

It was the worst year for CDO downgrades as 4,389 securities had their credit ratings cut, according to Morgan Stanley. More than 76 percent of the downgrades were on CDOs made up of bonds backed by assets.”

CDO sales should continue to fall through 2008. This should result in a tightening of credit and a general reduction in liquidity.

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