Updated from 1:49 p.m. ESTCountrywide Financial's ( CFC) shares plummeted to new lows Tuesday amid rumors -- later denied -- that the mortgage lender could be nearing a bankruptcy filing. The beleaguered company's stock closed down 28.3% to $5.43, a new 52-week low. Shares dipped as much as 34% to $5.05 in Tuesday trading -- even after a brief trading halt on the New York Stock Exchange and the company issued a statement denying the rumors Tuesday afternoon -- challenging the notion that the nation's largest mortgage lender is too big to fail.
Credit ratings firm Egan-Jones notes that Countrywide's funding avenues are becoming scarce, given that big loan purchasers Fannie Mae ( FNM) and Freddie Mac ( FRE) are expected to be scaling back mortgage acquisitions. Egan-Jones speculates that Countrywide may need as much as $4 billion to operate its business, due to the expected retrenchment of the mortgage originations and the moving away from dicey higher-margin loans. Should Countrywide file for bankruptcy, it would further roil a U.S. market that has been deeply stung by a slumping housing market after a heady boom in mortgage origination and homeownership. "This would be the ultimate a test of whether the government will let this thing fail or whether it's going to rescue it," said Peter Cohan, president of Peter S. Cohan & Associates, speculating on the implications on a possible Chapter 11 for Countrywide. "This could be one of the most difficult situations for government in the role of business." The U.S. government, led by Treasury Secretary Hank Paulson, has been extremely proactive in attempting to stave off the widespread calamity that could ensue if defaults in mortgages soar. Already in place is a plan to freeze low-interest teaser rates for homeowners for five years. Such efforts have been much maligned by Wall Streeters with free market mentalities, who view such moves as anti-capitalists bailouts. But a failure at Countrywide, if it ever happens, could have massive consequences. Countrywide, which has struggled since the summer in the face of a significant pullback in the mortgage sector, accounts for around 20% of mortgage origination in the U.S. The company reported a net loss in the third-quarter of $1.2 billion, or a loss of $2.85 per diluted share -- its first loss in its 25-year history. By transferring much of its business to its bank during the crunch in the securitization, the company expected to be profitable in the fourth quarter. It increased bank deposits by $1.7 billion in September, it reported in the third quarter. The markets, however, dicey since August, have not cooperated and many financial firms faced a rough road during the last two months of 2007.