Nearly 18 years ago I was finishing an MBA at the University of Chicago Graduate School of Business and preparing for a career in investment banking. At the time, there was an aggressive investment bank – Drexel Burnham Lambert that was built on the success of high yield/junk bonds and Michael Milken’s ability to sell them. Not to over-simplify a financial crisis, but from one moment to the next, Drexel Burnham, was out of the game. The credit market lost confidence in Drexel (at the time fraught with convictions of insider trading) and it could not borrow the short-term capital necessary to sustain its business. With no liquidity - no more Drexel. The company that provided billions in capital to finance MCI, Turner Broadcasting and most of the cellular industry disappeared despite a highly profitable business. It happened fast and led to a bankruptcy filing in February 1990.

Today, Countrywide Financial Corporation (NSYE: CFC), the US’s #1 mortgage lender may be facing a similar smack-down. To maintain liquidity, Countrywide was forced to dip into an $11.5 billion line of expensive credit to maintain liquidity. Rumors ran rampant in the press and blogoshpere that bankruptcy may be imminent if their access to liquidity does not improve.

CNN Money reported Countrywide’s response to the crisis

"In response to widely reported market conditions, Countrywide has elected to draw upon this entire (line of credit) to supplement its funding liquidity position," it said in its statement. "Countrywide has 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."

Those steps include tightening the standards for many types of mortgages that it offers. Most importantly will be its change in policy toward sub-prime loans (the junk bonds of mortgages), these loans, known in the industry as Atl-A loans, offer mortgages to people with less than stellar top credit or customers who could not provide full documentation of income.

From my view, while this is a response that is pro-active, it may be too little to late. In the end, access to short-term liquidity, will be the issue upon which the future rests, not operational changes.

From the LA Times

“The company's operation may indeed be stable, despite its own problems with defaults and foreclosures, which reached the highest levels in at least five years on the loans Countrywide collects payments on. ’The problems Countrywide is experiencing has nothing to do with its mortgage business,’ Cecala said. ‘By all measures, Countrywide is a well-run, profitable company. What they're finding out is that although they thought they had diversified funding sources, nothing is diversified in a worldwide credit crunch like we're in now.’"

One more reminder about Drexel. In the year or so preceding its quick demise, senior executives made hundreds of million of dollars, with Milken drawing $550 million. According to SEC filings, Countrywide Chairman and CEO Angelo Mozilo has put away nearly $13 million in profits in the past month dumping Countrywide stock as it falls from the sky. That is not helping my confidence in Countrywide’s outlook.

Investors showed their concern by selling off shares. Shares of Countrywide plunged in afternoon trading, and were down 24 percent at one point before closing down 11 percent. The announcement fanned investor worries about a broader crisis that looms in the credit markets.