Countrywide smashed by bankruptcy rumors; E*Trade slashed in financial bloodletting; spreads widen on two deals

By Evan Weinberger

New York, Jan. 8 - Bankruptcy rumors roiled Countrywide Financial Corp. Tuesday.

Shares in the United States' largest mortgage lender plunged more than 20% early in the day as the rumors gathered speed.

Countrywide denied the rumors.

"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, according to Reuters.

That stalled the slide for a little while, but the comeback - if being down 15% can be called a comeback - was short-lived. Countrywide stock (NYSE: CFC) closed down $2.17, or 28.40%, at $5.47.

Countrywide's stock wasn't the only thing that was hit. Phoenix Partners Group reported that investors were asking for 30% upfront and 5% per year on credit default swaps tied to Countrywide debt.

And Countrywide's convertibles, which had been trading in the 70s, both closed in the low 60s.

It was unclear where the bankruptcy rumors came from.

A New York Times story about Countrywide reported that the company may have falsified some documents involving several mortgage holders who had already entered into Chapter 11 bankruptcy, a trader pointed out.

Or it could have been investors with an interest. "It could be someone who shorted," an analyst said.

But eventually, one market watcher said, rumors of bankruptcy for Calabasas, Calif.-based Countrywide could come to fruition. This is not the first time that a rumored bankruptcy has led to a fall in the company's stock. "The Fed gets back into cutting rates because the market expects it. Bankruptcies can happen the same way," he said.

Another analyst said that the market has been gullible when it comes to Countrywide rumors, which have yet to come to pass. "I don't know how it can be that people are able to profit from this silliness, but the market takes the bait every time," he said.

Bank of America Corp. placed a $2 billion investment in Countrywide in August. The first analyst said that he couldn't see a scenario where BoA would allow that money to go to waste.

Bank of America (NYSE: BAC) lost $1.49, or 3.73%, to close at $38.41.

That was just part of the carnage during a late-day market collapse. The National Association of Realtors announced that its pending home sales index was down 2.6% in November, a sharper fall than had been expected. And AT&T CEO Randall Stephenson warned the Citi Media and Technology Conference in Phoenix that he saw "softness" in the company's consumer business. That sparked wider recession fears.

All three major indices fell sharply late in the afternoon.

The Dow Jones Industrial Average finished down 238.42 points, or 1.86%, for a 12,589.07.

The Nasdaq tumbled 58.95 points, or 2.36%, to close at 2,440.51.

The Standard & Poor's 500 closed at 1,390.19, a drop of 25.99 points, or 1.84%.

E*Trade dragged down

New York-based online brokerage E*Trade Financial Corp. was pummeled for a second consecutive day. Several market sources said the beating partly stemmed from the wider smashing of the financial sector.

Like Countrywide, E*Trade got a direct cash infusion from a private source - in E*Trade's case, it was $2.55 billion from Citadel Investors Group in November.

The market watcher said that many of those sorts of private investments have turned into bad bets for the lenders, and he's worried that others will not step in so readily. "These guys have all been wrong," he said. "The next guy doesn't want to be wrong."

The first analyst said it was too early to tell what will happen with the existing private placement deals, and whether that will stop further similar investments. "Six months later they may look all right, but right now they don't look so good," he said.

Even with the existing private money, E*Trade continues to take a pounding. Just a day after losing more than 12%, E*Trade stock (Nasdaq: ETFC) plunged 58 cents, or 20.49%, for a $2.25 close.

The market watcher said that because E*Trade is not saddled with the same level of debt as Countrywide, the online broker would be a more attractive takeover target. A takeover of E*Trade by a rival online broker has been a running source of speculation for months. "I can see them getting bought out because they don't have this enormous amount of debt on their books," he said.

He added that he'd heard whispers that E*Trade had been looking for additional financing in recent days but was unable to find any.

The analyst said he hadn't heard anything about that, and that he doubted Citadel would let its investment falter.

MBIA, Ambac tank

Staying with the theme of struggling financials who've received recent private capital infusions, Armonk, N.Y.-based bond insurer MBIA Inc. (NYSE: MBI) was hammered for a $3.64, or 20.66%, loss to close at $13.98.

MBIA's rival, New York-based Ambac Financial Group Inc. (NYSE: ABK), sank $3.92, or 16.70% on the day for a $19.56 close.

At the end of December, Warren Buffett announced that he would be getting into the bond-backing game rather than throwing money at the flailing firms. The market watcher said the Darwinian approach - starting new firms to compete with the old ones - may be the way to go in the future. "The clear way to do some of these things is to start up a new business and compete," he said, rather than throwing money at bad business models.

Clear Channel deal on track

The morning started with reports that the buyout of San Antonio-based radio station operator Clear Channel Communications Inc. was in trouble.

The Financial Times reported that overall economic weakness and the collapse of the PHH Corp. leveraged buyout last week were causing Bain Capital and Thomas H. Lee Partners to have second thoughts.

But a representative of the buyers said on CNBC Tuesday that the deal would go through.

Clear Channel (NYSE: CCU) fell $1.09, or 3.11%, to close at $34.01.

Spreads widen on First Charter, Alabama National

A market observer said that two other deals that are on the verge of closing, however, are being called into doubt by the market.

First Charter Corp., the Charlotte, N.C.-based holding company for First Charter Bank, is set to become a subsidiary of Fifth Third Bancorp by the end of the first quarter of this year. The $1.09 billion deal was agreed to in August. Fifth Third is a diversified financial services company based in Cincinnati.

And Alabama National BanCorporation, based in Birmingham, Ala., is on the verge of becoming part of RBC Centura Banks, Inc., a subsidiary of the Royal Bank of Canada. That $1.6 billion deal was agreed to in September and is set to close in the coming months.

The observer said the spread on the First Charter deal has moved out to 14%, and he expects that deal to close next month. The Alabama National spread is standing at around 4%, which is up from only around 2% a few weeks ago.

"It means that people have less faith in the deal going through," the observer said. He added that investors are trading on the likelihood of the deal going through, not the fundamentals, at this late stage.

The observer said he still expects both deals to go through. They're cash deals, not leveraged buyouts. But he called the trend "disturbing."

First Charter stock (Nasdaq: FCTR) lost $1.34, or 4.70%, for a $27.16 close.

Fifth Third stock (Nasdaq: FITB) slipped 67 cents, or 2.88%, to a $22.56 close.

And Alabama National (Nasdaq: ALAB) slid 36 cents, or 0.47%, to close at $76.57.

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