Countrywide up as financials' liquidity worry eases

NEW YORK (Reuters) - Countrywide Financial Corp shares closed higher on Thursday, but finished well off their best levels, after a $2 billion infusion from Bank of America Corp eased fears the largest U.S. mortgage lender could go bankrupt amid a global credit shortage.

Shares rose as much as 11.1 percent, but eased to close up 1 percent after Countrywide Chief Executive Angelo Mozilo told CNBC television that housing troubles could lead the U.S. economy into recession.

Bank of America announced the infusion on Wednesday, hours after the company along with Citigroup Inc, JPMorgan Chase & Co and Wachovia Corp said they each borrowed $500 million from the U.S. Federal Reserve, a symbolic move to assure markets that credit is available, if not always for the asking.

"We view both moves as attempts to 'prime the pump' to get liquidity flowing again," Lehman Brothers analyst Jason Goldberg wrote.

Bank of America said it bought preferred shares that yield 7.25 percent and can convert into Countrywide common shares at $18 each, a 17.5 percent discount to their Wednesday closing price.

The move soothed investors after Countrywide last week tapped $11.5 billion in credit lines after struggling to sell short-term debt to fund operations. At least two analysts said bankruptcy was possible if market conditions worsened.

In an interview with Reuters, Mozilo called the Bank of America investment a "vote of confidence" and a "priceless endorsement." He said, though, that housing and the economy aren't yet out of the woods, as falling housing prices lead to lower spending by worried homeowners.

"If this trend continues, it's going to have an impact on the overall economy," the 68-year-old Mozilo said. "I've seen this movie before, and the ending of the movie always ends up in some form of recession. I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what's going to happen next."

He also said Bank of America is not buying his company, which he helped found in 1969. "We've gone it alone for 40 years, and can go it alone for another 40 years," he said.

Countrywide shares closed up 20 cents at $22.02 after rising to $24.24 on the New York Stock Exchange. They remain down 48 percent this year.

Bank of America stock was up 18 cents to $51.83 on the NYSE. The Standard & Poor's Financials Index .GSPF> fell 0.5 percent. The Amex Securities Broker-Dealer Index .XBD> was little changed.

CAPITALISM AT WORK

Analysts said the Bank of America investment could make it Countrywide's preferred lender. If converted, the shares would give the bank about a one-sixth stake in Calabasas, California-based Countrywide.

The investment would boost Bank of America's exposure to mortgages, where it ranks fifth in market share, according to the newsletter Inside Mortgage Finance.

Kenneth Lewis, the Charlotte, North Carolina-based bank's chief executive, called the investment "a step toward a return to a more normal liquidity in the mortgage markets."

It also continues Lewis' recent practice of buying strategic stakes in companies such as student lender SLM Corp, China Construction Bank and Brazil's Banco Itau.

"This is capitalism at work," said Richard Sichel, chief investment officer at Philadelphia Trust Co. "It's the continuation of money moving and that is a positive for the market and investor confidence."

Moody's Investors Service and Standard & Poor's both said they may still downgrade Countrywide's debt ratings. A cut by Moody's would lower Countrywide debt to "junk" status. Fitch ratings changed its outlook to "evolving" from "negative."

Improved market liquidity may also help Wall Street investment banks such as Bear Stearns Cos Inc, Goldman Sachs Group Inc, Lehman Brothers Holdings Inc, Merrill Lynch & Co Inc and Morgan Stanley.

Market volatility, coming in large part from concern over soured mortgages, has caused mounting losses at a variety of hedge funds, including some at Bear Stearns and Goldman. Investor unwillingness to buy riskier securities has also left investment banks holding some loans meant to fund takeovers.