Countrywide stock plunges on bankruptcy fears

Shares of embattled lender Countrywide Financial Corp. plunged early today to their lowest level in more than a decade, amid new rumors that the Calabasas-based company would file for bankruptcy protection.

The stock also was hit by rumors that the company's debt would be downgraded by one of the major bond-rating firms.

The latest sell-off in Countrywide and other financial stocks dragged the stock market overall lower. The Dow Jones industrial average was down 141.36 points, or 1.1%, to 12,686.13 about 12:15 PST. It was the lowest point for the Dow since April.

Countrywide's shares fell as low as $5.76 before trading was briefly halted. The price rebounded somewhat when the shares resumed trading after the company issued a statement saying there was no truth to the bankruptcy 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," spokesman Rick Simon said in a statement.

After rising to $6.90 following the trading halt, the stock sank anew and was down $1.95, or 26%, to $5.69 about 12:15 PST.

The shares are down 35% this year after diving 79% in 2007.

Countrywide, the dominant mortgage lender of the housing boom, has been struggling since mid-2007 because of soaring defaults on sub-prime loans.

When the banking system credit crunch began to deepen in late summer, Countrywide began to find it difficult to borrow on Wall Street because lenders feared that it might sink under the weight of troubled mortgages.

Bank of America Corp. helped to bolster the company's finances Aug. 22 with a $2-billion capital infusion. Bank of America made the investment through preferred stock that could be converted to a 16% stake in Countrywide's common stock.

But as the housing market has continued to deteriorate, Countrywide's common shares have since plunged far below the $18-a-share conversion price on the preferred stock that Bank of America received.

Countrywide also is facing mounting legal woes. Its lending practices are under investigation by California Atty. Gen. Jerry Brown and the attorney general's office in Illinois.

The company and other lenders are under investigation by bankruptcy trustees who are looking into possible fraud against mortgage borrowers.

The New York Times reported today that Countrywide fabricated documents related to the bankruptcy case of a Pennsylvania homeowner who was targeted for foreclosure.

kathy.kristof@latimes.com