Did Countrywide Get a Hand from the Fed?

[EV_Ares]

The central bank's discount-rate cut probably wasn't aimed directly at the lender, but the move may have helped save it from bankruptcy and they are now laying off employees.
by Ben Steverman

The question was all over Wall Street last week: Was the credit crunch threatening the survival of Countrywide Financial (CFC) (see BusinessWeek.com, 8/15/07, "Mortgage Lenders: Close to the Edge?")? A bankruptcy filing by the largest U.S. mortgage lender would have jolted the economy, squeezing Countrywide's many creditors and tormenting the already wounded mortgage and housing markets.

Then the Federal Reserve acted on Aug. 17, temporarily cutting the primary discount-window rate by 50 basis points. The move let banks know that the Fed was willing to add liquidity to the financial system, loosening up increasingly tight credit conditions. That eased, at least for now, some of the worries about mortgage lenders that have been stung by deteriorating conditions in the housing market.

Was the Fed action on Aug. 17 effectively a Countrywide bailout, saving a company many saw as too big to fail? Fed watchers and banking experts say far more is at work here. The Fed wasn't reacting to Countrywide's plight as much as the conditions that put the lender in such deep trouble.

"What happened with is just a reflection of how quickly markets seized up," says Nancy Vanden Houten, an economist at Stone & McCarthy Research Associates.

Fears of a Failure
Despite the worries and rumors, many thought a Countrywide bankruptcy remained quite unlikely.

Until recently, Countrywide was seen as one of the strongest and most durable of players in an industry stretched by rising delinquencies on subprime and other risky mortgages. Even as a Merrill Lynch (MER) analyst warned last week that Countrywide could be approaching bankruptcy, several other analysts were saying the firm would survive even a bad credit crisis.

((((rest of story @ link))))

http://www.businessweek.com/investor/content/aug2007/pi20070819_751874.htm?chan=top+news_top+news+index_businessweek+exclusives

[MadHound]

1. Not just Countrywide,

But the entire financial sector. There is some real fear out there, since the financial sector has replaced the manufacturing sector as our leading economic engine. The subprime mess is starting to extend its way up into the mid level and top level institutions, and there is real reason to fear that the financial sector will tank, taking our economy with it.

This cut in the discount rate and the continued injections of cash are stop gap measures. Our economy is fundementally unsound, has been for awhile, and there aren't many, if any magic Fed tricks to continue putting off the inevitable crash.