strange also that mozilo has not executed any of his share options that he normally sells every two of three days. in fact he has sold no stock under $28. orders from boa probably. anyway here is the story. Bank of America Corp.'s $2 billion investment in Countrywide Financial Corp. last week was supposed to put an end to fears about the financial strength of the nation's largest home-mortgage lender. So why does Countrywide's stock keep falling? Countrywide's stock price is down nearly 12% since the purchase of convertible preferred shares was announced last Wednesday. That's largely because investors still don't know how badly Countrywide has been wounded by the recent credit crunch. At a minimum, Countrywide faces a hit to near-term earnings; some analysts expect a loss in the current quarter. At worst, the company could be forced to dump assets at fire-sale prices or seek another emergency infusion of capital, potentially slashing the value of its stock further. "Two billion dollars from Bank of America is not a lot compared to what they may need," says Stuart Plesser, an equity analyst at Standard & Poor's in New York. (More on the Countrywide deal in Breakingviews column.) Though Countrywide bills the investment a "vote of confidence," Mr. Plesser thinks the sale of preferred stock signaled distress. The preferred stock carries a yield of 7.25% and is convertible into a stake of about 16% of Countrywide's common shares, at $18 apiece. The stock had been $36 only five weeks earlier, and Mr. Plesser doesn't think Countrywide would have sold such a large stake at such a low price unless it needed cash immediately. Countrywide stock was at $21.82 just before the investment was announced late Wednesday afternoon. The stock then spurted to a high of $24.46 Thursday morning but has been falling since then. Yesterday, it fell 69 cents, or 3.5%, to $19.31 in 4 p.m. trading on the New York Stock Exchange. Part of the problem is that investors are in the dark. Countrywide's latest profit guidance came on July 24, when it forecast that earnings per share this year would be between $2.70 and $3.30, down from $4.30 for 2006. Since then, a near-panic among investors has changed almost everything for mortgage lenders. They no longer can count on financing their lending through commercial paper and other short-term borrowing because investors are shunning those markets. Investors also are reluctant to buy most loans or mortgage securities that don't come with the guarantee of government-sponsored investors Fannie Mae and Freddie Mac or insurance from the Federal Housing Administration. That leaves a question mark over the value of Countrywide's holdings of loans and mortgage securities. As of June 30, the company had about $34 billion of loans that were due to be sold to investors. That includes prime-quality loans, subprime mortgages for people with weak credit records, and Alt-A loans, a category between prime and subprime. Frederick Cannon, an analyst at Keefe, Bruyette & Woods, says the total amount of loans waiting to be sold may now top $40 billion, given the current difficulty of finding buyers for many types of loans. Mr. Cannon says it isn't clear what share of the loans can be sold to Fannie and Freddie or how much Countrywide may have to mark down the value of the others. Countrywide also had about $23 billion of "trading securities," mostly mortgage-related, as of June 30. Mr. Cannon worries that some of these also may have lost considerable value. A Countrywide spokesman says the "overwhelming majority" of those securities are backed by Fannie or Freddie or the U.S. government, and there is "no serious impairment" to the portfolio's value. In addition, Countrywide's savings bank held about $15.7 billion of mortgage securities, excluding those guaranteed by Fannie or Freddie, and may have to mark down some, Mr. Cannon adds. The spokesman declined to comment. Analysts can only guess at what the value of Countrywide's holdings might be at the end of the third quarter. But Paul J. Miller Jr. of Friedman, Billings, Ramsey & Co. says Countrywide may need to write down $1 billion to $2 billion in the value of loans that don't fit the criteria for sale to Fannie or Freddie. Keefe Bruyette's Mr. Cannon roughly estimates that Countrywide will have a loss of 99 cents a share in the third quarter. "What many people on Wall Street are trying to figure out now is: What will be the future profitability of this company?" says David Honold, a portfolio manager at Turner Investment Partners in Berwyn, Pa. Turner manages about $25 billion in assets and doesn't own Countrywide shares. Countrywide is counting on its savings bank, along with Fannie Mae and Freddie Mac, to fund nearly all of its future lending by drawing on deposits and borrowings from the Federal Home Loan Bank system. Countrywide officials say the bank's above-average interest rates on certificates of deposit and savings accounts are reversing a recent loss of deposits. New deposits have exceeded outflows so far this week, a Countrywide spokesman says. Meanwhile, Countrywide's lending is expected to drop sharply, at least in the short term, as it avoids making loans that can't be held as long-term investments or sold to Fannie and Freddie. The relatively conservative "conforming" loans that Fannie and Freddie buy tend to be much less profitable than the subprime, Alt-A and other "exotic" loans pumped out by Countrywide and other lenders until recently. Others worry about the $27.8 billion of option adjustable-rate mortgages held as investments by Countrywide's bank. These loans, known as option ARMs, give borrowers the choice of making minimal monthly payments -- no principal and even less than the interest normally due -- in the early years. If they make those minimal payments, the loan balance grows, setting the borrower up for a sharp rise in monthly costs. It is unclear how well borrowers will cope once the higher payments set in. These option ARMs, many granted in 2004 and 2005 at the top of the housing boom, will be "stress-tested" beginning next year, S&P's Mr. Plesser says. A "significant portion" of those option ARMs are covered by private mortgage insurance against losses because of defaults, the Countrywide spokesman says. If things get too rough for Countrywide, Mr. Plesser figures, federal regulators might arrange a rescue. Or Countrywide might raise cash by selling its large loan-servicing business. Investors may have to wait at least a few weeks for Countrywide to provide an update on its survival plans. An annual "investor forum," due to be held Sept. 5 and 6, has been delayed until Nov. 12. Countrywide says its chief executive, Angelo Mozilo, is set to address another investor gathering in San Francisco Sept. 18. The host is his new protector-apparent: Bank of America. http://online.wsj.com/article/SB118834716029611686.html?mod=todays_us_money_and_investing