Who was that masked analyst?

The world's stock markets went on a roller coaster ride this week, with the wild ups and downs tied to fears Countrywide Financial Corp. might have to stop funding loans.

Countrywide and other lenders have had difficulty borrowing money and selling their loans in the secondary market because of the slowdown in the housing market and fears about rising delinquencies and foreclosures.

Countrywide's stock nosedived Wednesday after Merrill Lynch & Co. analyst Kenneth Bruce warned that the company could even face bankruptcy, if the liquidity crisis lasts long enough and the company is faced to sell its assets at fire sale prices.

Countrywide further alarmed investors Thursday by announcing it had drawn down an existing $11.5 billion line of credit it had with banks, which prompted ratings agencies to downgrade their ratings of Countrywide's senior debt. That will raise Countrywide's cost of borrowing.

So did Bruce know about the draw down? The Wall Street Journal online, in what you could call an abridged profile of Bruce, suggests the Merrill Lynch analyst was more worried about problems in the commercial paper market, where mortgage lenders go for short-term money to finance their loans. A Canadian company, Coventree Inc. announced at the beginning of the week that it had been unable to sell new notes. 

So Bruce was apparently looking at the big picture -- including continued weakening of the mortgage market -- and how it could affect Countrywide, rather than any new, company-specific information. Bruce had just affirmed his "buy" rating on Countrywide on Monday before changing his mind and advising investors to sell on Wednesday, setting off a panicked rush for the exits.

With the Federal Reserve's move today to cut the discount rate -- lowering the cost of borrowing for Countrywide and other mortgage lenders -- stocks, including Countrywide's, have rebounded.

Some Countrywide investors are blaming Bruce for the alarming ride. But the questions he raised -- what will happen to Countrywide and other lenders if liquidity problems persist -- haven't gone away, others say.

Countrywide execs, in the mean time, seem to have put the whole episode behind them, saying they'll weather the liquidity crisis by switching to more conservative agency loans and eventually funding all mortgages through Countrywide Bank. Countrywide execs still think they can use the company's economy of scale to take market share away from ailing competitors during the downturn.

Update: click continue reading to see the text of the internal memo sent to Countrywide employees Thursday.

Memo to Countrywide employees from CEO Angelo Mozilo and COO David Sambol:

"We would like to share with you our perspective on the current environment, and what Countrywide is doing to navigate through the current market disruption and position the Company for long term stability and success. Before turning to that, we realize that the significant media attention during the past several weeks has been unsettling. Unfortunately, our industry is going through an extremely challenging period and our prominence as the nation’s leading mortgage lender means that the media, investors and other external stakeholders have an extraordinarily high degree of interest in Countrywide at this time.

Most of you are well aware that the liquidity in the secondary market for non-agency mortgage-backed securities has been nearly eliminated in the past several weeks. What began as a significant reduction in demand among secondary market investors for subprime bonds earlier in 2007 had, by the end of July, expanded to highly rated, AAA-rated securities. At this point, it is unclear when the secondary market will return to what could be characterized as normal.

Countrywide announced this morning that we have taken decisive steps which we believe will address the challenges arising in this environment and enable the Company to meet its funding needs and continue growing its franchise. The most important component of the actions we are taking is the acceleration of our long-held plans to migrate our mortgage business into our Bank. We expect to complete this transition as quickly as possible, and thereafter our mortgage banking business will be fully part of Countrywide Bank. Our Bank has approximately $100 billion in assets and a deposit franchise that will provide very reliable and stable funding for our mortgage business. Importantly, we do not expect this transition to materially change the way we operate, our key strategies, or our desire and intent to continue to be the dominant mortgage lender in the U.S.

We have also taken two additional important steps which were necessary to address secondary market liquidity for non-GSE eligible loans and our interim funding needs as we complete the transition to the Bank:

--As you know, we have dramatically curtailed our guidelines for non-agency eligible loans, consistent with what our primary competitors have done;

--We announced earlier today that we have drawn on our funding liquidity position by drawing upon our bank lines of credit which provided an infusion of $11.5 billion to supplement the Company’s liquidity.

With these steps that we have taken, our mortgage business is no longer reliant on funding from the public commercial paper markets, which have been materially disrupted over the last two weeks.

You may have also heard or read earlier today that the rating agencies reduced their ratings on our publicly issued debt. We want to put this into perspective for you. First, the Company fully anticipated this as a reaction to our announcement that we have drawn on our bank lines of credit. Secondly, the revised ratings still ascribe to Countrywide an “investment grade” debt rating. And most importantly, the negative implications of lower public debt ratings for the Company are significantly less under our Bank funding strategy.

Although the secondary market disruptions have created significant challenges for Countrywide, we have also seen the accelerated shakeout in the mortgage lending industry that we have long predicted. In fact, we have recently completed several small mortgage company acquisitions, and we are in the process of hiring several hundred loan officers from companies who recently went out of business. These are the type of market share growth opportunities that we believe will continue to present themselves in the coming months.

This is unquestionably one of the most challenging times in Countrywide’s history. We know that you are working hard to continue to deliver outstanding value to our customers and business partners, in spite of the environmental challenges. You should know that we value and recognize your incredible contributions and efforts.

Our entire senior management team and many others have been devoting their full energy and their complete commitment to Countrywide to position the Company for stability and success. As we manage through this difficult cycle, never forget that we at Countrywide are the very best in this business, and with your collective efforts, focus and commitment, we have no doubt that we will work through the challenges in this transitional period and continue our history of success.

Thank you for your ongoing dedication to Countrywide."

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