Mr. Mozilo Goes to Washington

by Kevin Duffy
by Kevin Duffy

On September 12, most of the country's largest mortgage lenders went hat in hand to DC to chat with Treasury Secretary Hank Paulson. The parade was led by Countrywide Financial CEO Angelo Mozilo, followed by high-level execs from Wells Fargo, Citi Mortgage, JP Morgan Chase, and HSBC. As CNBC’s Diana Olick blogged, there was a bit of turf defending and finger pointing amid the "let's do what's right" love-fest...

Unlike periods of financial turbulence I've witnessed over many years, this turbulence wasn't precipitated by problems in the real economy. This came about as a result of some bad lending practices.

~ Hank Paulson

Real estate values have clearly caused most of the problem.

~ Angelo Mozilo

After the meeting, Mozilo did what he does best – shmooze with the press. We parsed the interview and offer our own interpretation...

I don’t think there’s anybody doing more than Countrywide in terms of trying to help these people stay in their homes where that’s possible. So we just continue to work as diligently as we can to make certain every step is taken to preserve the integrity of homeownership. And we’ll continue doing that, and working with the government and any agency we can to make sure that we continue to do the right thing, and we get as much help as we can from the agencies – from Fannie, from Freddie, from FHA… I think everybody wants to do the right thing, and everybody’s on the same page.

Translation: We all just want to save our own bacon, even if it comes at taxpayer expense. Bringing the American dream to the less fortunate is the best way to cover our scam. Most people, especially reporters, fall for this all the time.

Countrywide’s doing fine. And we’re gonna continue to grow…

Translation: We're in deep doo doo.

It’s always been a prejudicial problem. You know, it’s a risk-based process that we have in this country. But my concern really is that with constraints now being placed on lending, particularly subprime, is the gap is going to widen dramatically between the have and have-nots. That’s my deep concern.

Translation: I have no problem playing the class envy card. Most are too ignorant of economics to realize there's no free lunch, especially when it comes to buying and maintaining a home.

In terms of increasing the Fannie/Freddie limits, increasing the FHA loan amounts, getting the cap off Fannie and Freddie… I’m for that because we need liquidity in the marketplace… And the government has to play that role right now, in creating liquidity, so I’m in support of it.

Translation: We have a $209 billion "distressed" loan portfolio against a mere $14 billion in equity. We’d love to have the GSEs take some of it off our hands.

I think when you have increasing values as we had – tremendous values similar to the tech boom – everybody wanted to own a piece of real estate to get into the game. And so the rapid increase in values was the problem, and with that came some lending practices that certainly, in retrospect, were not acceptable. And now you have those values receding and… now all the sins of the past are being exposed as a result of receding real estate values. We’ve got to get real estate values at least stabilized in order to keep these people in homes so they can finance themselves out of the problems that they have.

Translation: I'm tossing you a crumb of truth here, so listen up. After the boys at the Fed dropped interest rates through the floor earlier this decade, they inadvertently ignited a housing boom. Everyone and his brother thought real estate always went up and we simply let them place that bet on margin with hardly any money down. Our bad. I'd love to tap our underwater customers on the shoulder and get them to bring their equity up, but it's too late for that – you can't get blood from a turnip. So now we're left holding the bag and our lenders are tapping us on the shoulder. We're basically screwed, and the only thing that can save us is a new bull market in real estate.

Three weeks ago, Mozilo appeared on CNBC berating a Merrill Lynch analyst (and former employee) for having the nerve to issue a sell rating on his stock, calling it irresponsible and tantamount to yelling fire in a crowded theater.

Yesterday, it was revealed some employees are now suing the company because they held Countrywide stock in their 401(k)s while Mozilo and his lieutenants assured them the riskiest loans were sold off and those remaining on the books were adequately reserved. At the same time, insiders unceremoniously dumped $350 million of their shares over the past year or so.

On the same day, Countrywide issued a press release admitting mortgage loan fundings for August dropped 17% from a year earlier. President and Chief Operating Officer David Sambol, apparently a quick study under the tutelage of Mozilo, was stoic and reassuring:

Looking forward, the Company expects that it will be a long-term beneficiary of the current conditions and corrections in the mortgage industry, and we are confident that the actions which we have taken in response to the current environment will position us for profitable future growth and success.

How does anyone in his right mind believe any of the spin coming out of Countrywide these days?

Perhaps this comment posted to a blog critical of Angelo Mozilo’s antics sums it up best:

Mozilo is the last remaining Oompa-Loompa, thus his beautiful orange glow. Unfortunately he isn't quite as efficient as Willy Wonka was at running the chocolate factory.

September 15, 2007

Kevin Duffy [send him mail] is a principal of Bearing Asset Management.

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