Posted on Thursday, October 21, 2010
It is hard to see how the Mozilo settlement -- coming on the heels of another weak SEC settlement with financier Steve Rattner -- will deter future wrongdoing. . . . Indeed, it could have the contrary effect. If you can make a great fortune behaving badly, get busted, and still end up with most of that [fortune], then you've come out way ahead. At least in financial terms.
Countywide reaped huge profits -- and, eventually, produced huge losses for its shareholders -- through a high-wire strategy that focused on selling huge volumes of subprime loans and other risky products.
One of the ironies of Countrywide's fall was that Mozilo had been hesitant, at first, to jump into the subprime market. As I write in my new book about the subprime debacle, The Monster, Mozilo and Countrywide eventually succumbed to the temptation to follow the example of Ameriquest Mortgage Co. and its billionaire owner, Roland Arnall, an entrepreneur who was in many ways the founding father of subprime.
The inventive mortgage products emerging in the home-loan market were watched closely by the heaviest of the industry's heavyweights: Countrywide Financial's Angelo R. Mozilo. Mozilo's company had established itself as the largest mortgage lender in America by providing loans to home owners with good credit. Mozilo called his company "my baby." For much of his career, he had been cautious about the kinds of loans his company made. Countrywide had mostly steered clear of subprime as other lenders dived into the market throughout the 1990s. Mozilo worried that subprime loans were too risky, in some cases even "toxic."
While Ameriquest's methods may have made Mozilo uneasy, he wasn't so troubled that he kept Countrywide from joining the subprime gold rush. His company had survived decades of real-estate booms and busts, and he thought it had the brains and brawn to handle the risks of subprime better than the upstarts. Mozilo's competitive instincts beat out his caution. He couldn't accept being second or third. "It's a question of dominance," he told investors. He didn't like that Countrywide trailed Ameriquest in the subprime lending rankings. By 2003 Arnall's companies had captured nearly 12 percent of the subprime market; Countrywide did barely half as much subprime volume, with a market share of just 6 percent.
Besides, the real money in the mortgage business was now in subprime, not in prime loans. When Countrywide sold prime loans to investors, its average profit margin was 0.93 percent; when it sold subprime loans to investors, the company's profit margin nearly quadrupled, to 3.64 percent. The fees, interest rates, and prepayment penalties embedded in subprime loans made them much more seductive to investors.
Countrywide's Size, Clout
Though Mozilo's company came late to the party, once it was there, its size and clout deepened the pain that subprime visited upon home owners and the financial system. Countrywide did little to pull back on its subprime push, even in 2006, when there were signs of an impending crash. "You have to make a choice: to get out or not. And they stayed," a longtime mortgage industry watcher told the Los Angeles Times. "It's hard when you're following someone off a cliff to know when to stop."
In early 2008, Bank of America purchased Countrywide, once worth as much as $26 billion, for a fire-sale price of $4 billion.
Countrywide might have survived if its founder hadn't become fixated on competing with Ameriquest, Muolo, the National Mortgage News editor, said. "If he hadn't followed Roland Arnall down the subprime path this would never have happened," Muolo said. "It's ego and ambition that sunk him."
Michael Hudson is a staff writer with the Center for Public Integrity and author of The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America -- and Spawned a Global Crisis (Times Books, October 2010).