Reading the SEC fraud-and-insider-trading complaint (PDF) against Angelo Mozilo, I was struck by how very much the former Countrywide chairman and CEO understood about the slipping lending standards that eventually led his mortgage firm to collapse in on itself. Inside his company, he was actually quite vocal about making changes to fix the situation. He wasn’t oblivious. He was ignored. Even though he was chairman and CEO, he didn’t manage to find a way to get done what he wanted to do.
As recounted in this Time.com story, the SEC’s point is that Mozilo—plus COO and president David Sambol and CFO Eric Sieracki—talked extensively about how loans were getting riskier and considerably more difficult to understand at the same time they were loading up on more of those risky loans and telling investors everything was hunky-dory. (Stop me if you’ve heard this one before.)
For instance, at an investor conference on September 13, 2006, Mozilo called Countrywide a “role model to others in terms of responsible lending” and discussed the firm’s “prudent underwriting guidelines” with respect to pay-option ARMs (those mortgages in which borrowers got to pick how much they paid each month, even if the amount fell short of the interest due, let along the principal). And yet that same summer, Mozilo (and others) had become deeply concerned with Countrywide’s pay-option ARM portfolio—the percentage of people making just the minimum payment had jumped from 37% to 71% in less than a year—and had sent out a number of warnings. Just two weeks after the investor conference, Mozilo wrote an email to Sambol and Sieracki: “[we] have no way, with any reasonable certainty, to assess the real risk of holding [Pay-Option] loans on our balance sheet… The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.” He wanted to get rid of the entire business.
But Countrywide didn’t. Mozilo also wanted to include a letter to every new borrower getting a pay-option ARM expounding on the dangers of negative amoritzation (i.e., making too small a payment and seeing interest owed go up, not down), and encouraging people to pay down their mortgages faster. That didn’t happen either.
Why not? It’s tough to tell from the SEC complaint—after all, it’s making a case for fraud and insider trading (that second charge is leveled only at Mozilo), not bad management. But it does nonetheless, time and again, cast Mozilo in the role of a person raising red flags. (Others were as well, including, notably, chief risk officer John McMurray.) In September 2006, Mozilo wrote an email to COO Sambol, warning that certain loans were “mispriced” in the secondary market, and should that mispricing correct, Countrywide could be forced to write down swaths of its loan portfolio. In another email, he worried about evidence that an increasing number of borrowers were lying about their income in order to lock in mortgages. I’m not sure which is worse—for a CEO to turn a deaf ear to warnings from his underlings or for those underlings to turn a deaf ear to his.
Now, I’m by no means saying Mozilo is a misunderstood good guy. He was still going out in public, talking about how Countrywide loans were “all high FICO,” when, in fact, they weren’t, and glorifying his firm’s underwriting when, in fact, it had implemented a policy of matching competitors’ loans with very few questions asked.
Still, I wonder if the thing Mozilo is most at fault for, more than anything else, is fecklessness.