Countrywide Dives After Tapping Banks For Needed Funds

Roiling markets for a second day, Countrywide said Thursday that it drew down all of an $11.5 billion credit line after the mortgage giant struggled to raise short-term debt.

Shares of the lender crashed nearly 30% intraday before rebounding to close down 11%.

The major market averages fell more than 2% before rallying late. The Nasdaq and Dow ended modestly lower, while the S&P 500 closed up 0.3%.

Stocks sold off hard Wednesday as Countrywide sank 13%. Merrill Lynch downgraded the lender to sell from a buy, saying it could face bankruptcy if liquidity worsens. Rumors -- apparently true -- quickly spread that Countrywide couldn't raise short-term debt.

On Thursday, another analyst said Countrywide might go under if there's a long credit squeeze.

"Countrywide might be forced to sell assets at a deep discount, putting tremendous pressure on its book value and stock price," wrote Paul Miller of Friedman Billings Ramsey.

Moody's, Standard & Poor's and Fitch all cut Countrywide's debt ratings Thursday.

The credit crunch has spread from specialty subprime lenders to larger institutions like Countrywide that primarily make higher-quality loans. Analysts say other companies are also being affected.

"In the short run, everybody's going to have more trouble borrowing money," said Ted Ake, head of bond trading at Mizuho Securities USA.

The Fed said Thursday that commercial paper outstanding fell by a sizable $90.1 billion in the week ended Aug. 15 to $2.132 trillion.

Investors rushed into short-term Treasuries, with the two-year yield plunging below 4% intraday. Fed funds futures have priced in several rate cuts by year-end.

But for now tighter credit isn't so damaging that it'll prompt the Federal Reserve to cut interest rates, some analysts said.

"Companies that have no connection to the mortgage business still have access to commercial paper. They have to pay more, but the market is still functioning," said Sabur Moini, head of credit strategy at Payden & Rygel.

Brokerages rebounded Thursday after Fitch said they had ample liquidity. Wall Street firms don't rely as much on commercial paper as they did in 1998, when credit woes nearly sank Lehman Bros.

The Fed on Thursday added $17 billion to the banking system to add liquidity to sputtering credit markets, the latest in a series of interventions over the past week.

Countrywide said Thursday that it was raising its lending standards. It reported earlier this week that delinquencies had reached their worst level in more than five years.

"There's been a repricing of risk that is healthy and normal and had to occur," said Jim Keegan, senior portfolio manager at American Century Investments.