The financial sector has been taking it on the chin over the last half of 2007 due to the collapse in the subprime mortgage sector. The first casualty was American Home Mortgage; this past summer the company collapsed and started a domino effect.
It hit every major financial institution, from banks to brokerage firms such as Citigroup (C) to Morgan Stanley (MS), but of course it doesn't stop there; we have to put our focus back on the companies that face potential extinction if they do not rebound.
The company that, in my opinion, that will be the recipient of the blast to come is the largest U.S. lender: Countrywide Financial Corp (CFC). Since the demise of American Home Mortgage and then the subsequent bailout by Bank of America (BAC) back in August 2007, Countrywide dodged a few bullets when mortgage backed securities directly affected the banks and brokerages.
Firms such as Morgan Stanley, Citigroup, UBS (UBS) and Merrill Lynch (MER) are on the long list of financial institutions that reported or pre-reported financial losses in the multi-billions due to the subprime debacle. But now that Wall Street is beginning to accept this, the focus is back on Countrywide Financial and companies in that sector.
Countrywide is facing a ratings downgrade, not just from analysts but as far as their S&P and Moody's standings. This basically shows their credit worthiness, and when they begin to get downgraded on that level then you will see a major slip in the stock. Junk bond status is not something they need at this point.
The reason for this is that it will become increasingly difficult for them to borrow additional funds to bail themselves out of the problems and rebound in time, well at least potentially rebound. So at the looks of things, even though Countrywide Chairman and CEO Angelo Mozilo would adamantly disagree, Countrywide is on the ropes falling to the mat, and the ten count may be imminent if they do not perform a miracle - and fast. We may get a dead cat bounce while institutions try to slide out before year-end, but at the end of the day Countrywide may be punch drunk with the downslide not too far away.