Countrywide: Think Enron without the Accounting Fraud?

Angelo Mozilo strikes me as a pretty honest and very smart guy and I wouldn't dream of comparing him to Ken Lay or Bernie Ebbers, but Countrywide could easily go into an Enron-like death spiral if their access to credit dries up.

Well, it happened. No surprise. Merill Lynch, which assured markets last week that Countrywide was fine and could access all of the credit that it needs to keep its mortgage business alive, actually did an about-face. Analyst Kenneth Bruce, just two days after he published a note rating Countrywide stock \"buy\", said that credit markets had deteriorated so rapidly that demands for more collateral or repayments from lenders, along with forced asset sales, could weaken Countrywide, causing a liquidity event. He furthered, if creditors were to cut off funding to Countrywide and force it to sell assets in a weak market, \"then it is possible for CFC to go bankrupt.\"

I am not sure what happened in the credit markets in last two days that wasn't present before and would have been measureable or caused Bruce to change his mind so quickly. Did this Merrill analyst really determine that liquidity injections haven't calmed the market today? Could he not have made the same determination two days ago?

Whatever, the case, the implications of an analyst at a major firm using the b word are clear. The utterance sent Countrywide and wow, even the Nasdaq, which was supposed to weather this credit storm (after all Google and Cisco aren't in the mortgage business, folks!) tumbling.

My friend in a senior position at Countrywide say that the access to billions in capital has not changed, and that the bank will not collapse.

But, I am concerned. Does the B-word now become a self-fulfilling prophecy? Will creditors now cut Countrywide off on the basis of an analyst comment like they did with Enron (in this case on the basis of a comment and without a hint of fraud)?

I hope not, but crazy things happen in crazy markets. If it happens, Countrywide is headed for a free-fall to 0 and my friend is moving back East.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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  • LAX1897

    August 16, 2007

    It isn't going to happen. Countrywide is too big, too important, too powerful and to stable to be taken down by some zit-faced 25 year-old who wants his name in lights at Merill. This is as low as it goes. Bernanke's got the situation under control. The bounceback in the market and in this will be strong, crushing the shorts!

  • Sam Cass

    August 16, 2007

    I agree with LAX. I don't think Countrywide is going under nor do I think the Fed would ever let it. When Enron collapsed it hurt employees and shareholders. A Countrywide collapse would be a disaster for depositors and the Fed was created to prevent that.

  • HuntRG

    August 16, 2007

    There was so much fraud with Enron that Countrywide could be gone tomorrow and it still would never be appropriate to use the two in the same sentence.

  • Be10

    August 17, 2007

    agree with HuntRG, the parallels aren't there. countrywide is a reputable company (as far as I know) that got stuck in the credit crunch. enron was a fraud that eventually was exposed.

  • McLarty

    October 19, 2007

    Now that the SEC is examining Mozilo, you can change the title to "Think Enron" or "Think Enron with Still More Greed and More Accounting Fraud"

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