Countrywide Denies Bankruptcy, Stock Plunges 27 Pct

By Jonathan Stempel

NEW YORK (Reuters) - Countrywide Financial Corp CFC.N on Tuesday denied market speculation that it might seek bankruptcy protection, but its shares sank 27.4 percent in their biggest drop since the 1987 stock market crash on concern the largest U.S. mortgage lender's problems would worsen.

The lender said there was "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," but its shares closed down $2.09 at $5.55, their lowest close since 1996.

Countrywide has said it has sufficient liquidity to operate, but credit rating agency Egan-Jones Ratings Co said on Tuesday the company "is severely challenged and might falter if it does not receive an infusion of at least $4 billion within the next couple of weeks."

Shares of Countrywide have fallen 86.9 percent in the last year. Tuesday's decline pulled the KBW Mortgage Finance Index .MFX down 7.1 percent and the Standard & Poor's Financials Index down 3.6 percent. Other decliners included mortgage lender IndyMac Bancorp Inc IMB.N, down 10.9 percent, and bond insurer MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz), down 20.8 percent.

Tuesday's decline also followed a New York Times article citing court records that it said showed Countrywide, based in Calabasas, California, fabricated documents related to the bankruptcy of a Pennsylvania borrower.

"There is renewed speculation that Countrywide will declare bankruptcy or have some default action," said Al Greenberg, head options floor trader at broker-dealer BNY ConvergEx Group in Chicago.

Credit default swaps on debt of Countrywide's home loans unit soared. Investors demanded 29 percent upfront and 5 percentage points a year to protect against default for five years, up from 21.5 percent upfront plus annual premiums on Monday, CMA DataVision said. Swaps trade on an upfront basis when the market considers a company "distressed."

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