Countrywide Tanks on Bankruptcy Rumor

(Updated to reflect response from Countrywide)

If markets needed any proof of just how jittery investors are to start the new year, one need look no further than a wild swing of events Tuesday morning at Calabasas-based Countrywide Financial Corporation.

Shares of the nation’s largest lender fell sharply as unconfirmed rumors of a potential bankruptcy spread throughout the morning.

A report at Bloomberg found numerous traders citing rumors of a pending bankruptcy, while the Wall Street Journal’s MarketBeat Blog also reported similar sentiment based on activity in credit default swaps and options contracts.

Dow Jones later reported that the rumors — which led Countrywide shares to their worst drop since October 1987 — were without merit, citing a company spokesperson. Reuters has coverage of the denial from Countrywide, as well.

The stock had fallen $1.67 to $5.97 in early trading, but had rebounded to $6.73 after news of Countrywide’s rebuttal hit the wires.

I have a theory — probably inane — on how this all got started. Is it possible that this morning’s New York Times story on Countrywide’s missteps in a consumer bankruptcy case was twisted around? I can easily see someone overhearing a morning conversation containing the words “Countrywide” and “bankruptcy,” as a result.

It’s just a theory, but you never know — it could have happened.

Disclosure: As of when this post was published, the author owned various put option contracts on CFC.