Aug. 23 (Bloomberg) -- Bank of America Corp. bought $2 billion of preferred stock from Countrywide Financial Corp., erasing concern the nation's largest mortgage lender will go bankrupt and boosting investor confidence in stocks worldwide.

``Countrywide is no longer on the endangered company list,'' Punk Ziegel & Co. analyst Dick Bove wrote in a note to clients yesterday. ``This investment makes sense for both companies. Bank of America will now presumably be the preferred lender to Countrywide.''

The cash infusion will help Countrywide withstand the drought in short-term financing that has starved mortgage lenders. The highest rate in 10 years of bad loans held in subprime mortgage bonds drove up the cost of credit for borrowers worldwide, forcing central banks to pump more than $400 billion of emergency funds into money markets.

Stocks in the U.S., Europe and Asia advanced. Calabasas, California-based Countrywide, which lost half its value after peaking on Feb. 2, rose as much as 12 percent to $24.46 in composite trading on the New York Stock Exchange. The shares were up $1.66, or 7.6 percent, to $23.48 at 9:54 a.m.

Bank of America, the second-biggest U.S. bank, gets shares that yield 7.25 percent and can be converted into common stock at a price of $18, Countrywide said yesterday in a statement. While the shares are convertible at any time, Bank of America will be subject to trading restrictions for 18 months, according to a regulatory filing by Countrywide today.

Stabilizing Countrywide

``While this deal stabilizes Countrywide's liquidity position, it comes at a steep cost to shareholders,'' Moshe Orenbuch and Kerry Hueston, analysts at Credit Suisse Group in New York, said in a note to clients today. They estimated that it will increase Countrywide's shares by 19 percent, diluting earnings for holders of common stock, and add $145 million annually in preferred dividends.

Bank of America also gained the right to match any offer for Countrywide, according to a Countrywide regulatory filing today. JPMorgan Chase & Co. analysts led by Vivek Juneja in New York said that ``likely'' gives Bank of America the opportunity to buy Countrywide ``longer term.''

Bank of America shares rose 4 cents to $51.69.

The credit market turmoil led investors to shun short-term debt backed by home loans. Yields on asset-backed commercial paper soared to 6.09 percent on Aug. 21, the highest since January 2001.

Returning to Normal

The lack of financing prompted the U.S. Federal Reserve to cut borrowing costs for banks. The Aug. 17 move, designed to direct more cash to companies that lost access to short-term borrowing, came a day after Countrywide tapped $11.5 billion of emergency credit lines because it had been shut out of the commercial-paper market.

``With last week's Fed action and today's announcement, it appears that the mortgage capital markets will return to more normal levels of activity and liquidity sooner than we thought,'' Fox-Pitt Kelton Inc. analyst Howard Shapiro wrote in a note to investors yesterday.

Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, announced yesterday that it will close its subprime-lending unit and fire 1,200 employees. Accredited Home Lenders Holding Co. announced 1,600 job cuts, and HSBC Holdings Plc said it would eliminate 600 jobs in the U.S. and close a mortgage office in Indiana.

Countrywide shares slumped 24 percent in two days on Aug. 15 and 16 after a Merrill Lynch & Co. report predicting the company's cash shortage might force it into bankruptcy.

Stake in Countrywide

Converting the preferred stock would give Charlotte, North Carolina-based Bank of America 111 million common shares, or a 16 percent stake in Countrywide, Bove estimated. The transaction will be ``additive'' to Bank of America's earnings, he said.

That would make Bank of America the biggest shareholder in Countrywide, ahead of Axa SA with an 11 percent stake. Other big investors include Legg Mason Inc. with an 8.7 percent holding and Barclays Global Investors with 8.5 percent.

Countrywide Chief Executive Officer Angelo Mozilo said the bank's investment ``strengthens our balance sheet, enabling us to position Countrywide for future growth.''

``We were able to go to California, look at their operations and their books,'' said Robert Stickler, a spokesman for Bank of America. ``We determined the value is greater than what the market was giving them credit for.''

Buoyed by Speculation

In January, Countrywide shares were buoyed by speculation that it might be acquired by Bank of America. The stock tumbled after Bank of America CEO Kenneth Lewis said he had reservations about the practice of lending through mortgage brokers, as Countrywide does.

``We like the product, but we don't like the business,'' Lewis said Jan. 31. Six months later, in a June 19 interview, he said the slowdown in home sales was ``just about over'' and predicted that the U.S. economy would pick up in the second half of this year.

In yesterday's statement, Lewis said Bank of America's investment in Countrywide ``will be a step toward a return to more normal liquidity in the mortgage markets.''

The transaction buoyed the beaten-down shares of mortgage lenders. Thornburg Mortgage Inc. gained as much as 8.6 percent today and IndyMac Bancorp added as much as 5.5 percent. Accredited Home Lenders rose as much as 6.6 percent.

Countrywide, which made $421.1 billion of loans last year, has struggled to keep its footing after investors stopped buying mortgages and short-term debt investors refused to refinance its commercial paper, which is debt due in 270 days or less.

Capital Needs

The company may need to raise more capital because falling prices for home loans in the secondary market, where they're bought and sold by Wall Street traders, have pared the value of its mortgage portfolio, according to Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania.

The assets are probably worth ``less than its outstanding obligations,'' he said.

Bank of America won't get any Countrywide board seats in connection with its investment, Stickler said.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: August 23, 2007 10:03 EDT