An on-going question I keep asking as I watch powerful people make bad decisions in politics and business is this: Do they understand the consequences of what they are doing? In the case of former Countrywide Finance CEO Angelo Mozilo some commentators I came across months ago claimed Mozilo was a populist believer in what he was doing. In this theory Mozilo thought he was extending credit to deserving borrowers who just weren't able to get credit from staid racist mortgage companies and banks. But emails released as part of criminal charges against Mozilo show in 2006 Mozilo knew Countrywide was issuing terrible toxic loans.
In March 2006, Mozilo wrote that the lender’s program of granting subprime loans for 100% of the value of a borrower’s home was "the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from [underwriting] guidelines be permitted irrespective of the circumstances."
He was using the term privately before the term toxic entered the mainstream lexicon for talking about loan quality.
Furthermore, in an April 7, 2006 email to Sambol concerning Countrywide’s subprime 80/20 loans, Mozilo fumed: “In all my years in the business I have never seen a more toxic prduct. [sic] It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down …the product will become increasingly worse. There has [sic] to be major changes in this program, including substantial increases in the minimum FICO…. Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.”
So why didn't Mozilo just order a stop to the issuance of such loans?
Irresponsible loans to folks lying about their income, toxic zero-down deals, pay-option loans with exploding payments: All the misdeeds that brought the mortgage industry down are cataloged in Mozilo's own e-mails. You would think that with all this coming straight from the top, Countrywide would have been racing to change its practices. But the stunning thing is that this is in no way the case. What's most striking about the Mozilo e-mails is not that he continued to present a rosy picture of Countrywide's prospects to investors. That's dishonest but easy to understand. It's that all those complaints didn't actually change how Countrywide did business.
Gimein advances a few theories. Did Mozilo just want to sell (which he did) a couple hundred million dollars worth of Countrywide stock without spooking the market with a bit cut-back in lending? Were the memoes a form of cover-your-ass where he went on record stating his opposition as if somehow he didn't have the power to stop them? The board of directors made him do it? Whatever his motives, he can't honestly claim ignorance as Countrywide's lending practices contributed to the huge and disastrously damaging housing bubble.
|Share |||By Randall Parker at 2009 June 07 08:38 AM Economics Lending|