Shares of Countrywide Financial Corp. (NYSE: CFC), the largest U.S. mortgage lender, fell 13 percent on Tuesday over investor concerns that it could fall into bankruptcy amid an ongoing liquidity crunch.
Before the opening bell, Merrill Lynch analyst Kenneth Bruce cut the companyâ€™s rating from a 'buy' to a 'sell.' He mentioned a possible scenario where if creditors demanded more funds and collateral, while forcing asset sales, the company could be in trouble.
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, he said. If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.
Bruce noted that the market has yet to calm down despite billions of dollars of additional liquidity added to the banking system by the U.S. Federal Reserve over the past week.
However, he said did not expect that the lender would go bankrupt.
We continue to think the company can survive a period of secondary market instability, Bruce said. However, the steps that it would take to preserve shareholder value would be expensive, likely leading to further share price declines from here.
Shares of Countrywide plunged $3.17, or 13 percent, to $21.29.