by John M. Curtis
(310) 204-8700

Copyright March 9, 2008
All Rights Reserved.

ountrywide Financial Corp. became the object of an FBI investigation, questioning whether America's biggest sub-prime lender misrepresented its financial health in filings to the Securities and Exchange Commission. Countrywide's 69-nine-year-old co-founder and CEO Angelo Mozilo cashed in $410 million in stock options when share prices peaked at $40, impeccable timing when you consider the sub-prime meltdown—or so-called B-paper loan crisis—dropped its stock price to around $5. Mozilo was dragged before Rep. Henry A. Waxman (D-Calif.) and the House Government Reform and Oversight Committee. “You had good timing,” Waxman quipped facetiously. Mozilo raised eyebrows when he changed his executive “trading plan” to accelerate his stock options sales before the bottom fell out share prices, netting him recently $141 million.

      Mozillo, dressed in an Italian suit, starched white shirt and bright red tie, didn't flinch, telling Waxman he was looking ahead to retirement. “The goal was to reduce my holdings because of my retirement . . . almost all my net worth was in Countrywide,” explaining why he dumped his shares. Mozilo rejected the idea that his stock sales were timed to coincide with Countrywide's buyback program, where the company bought its own stock to shore up prices. Had Mozilo dumped his shares without a buyback program, it might have sent prices into a nosedive. Mozilo insisted there “was absolutely no relationship between the buyback of stock and my sale of options,” denying any insider trading or shenanigans. That was the same excuse given by former Enron CEOs Ken Lay and Jeffrey Skilling before they liquidated their holdings, plunging the company into Chapter 11.

      Mozilo's “absolute” assurance that he had no insider's info about a growing crisis in the sub-prime industry met Waxman's skepticism. Waxman's committee was also treated to personal assurances from former Merrill-Lynch & Co. CEO Stanley O'Neal and Citigroup CEO Charles Prince, both reaped hundreds of millions in executive compensation while their companies reported staggering losses. Countrywide far eclipsed all other lenders in the sub-prime market, now the subject of scrutiny by federal regulators. Federal lending guidelines actually provided the permissive atmosphere where sub-prime lenders made homeownership possible for millions of otherwise unworthy borrowers. Whatever pitfalls happened in the sub-prime industry has little to do with obscene executive compensation packages—the dream of every ambitious MBA student or graduate.

      FBI investigators want to know whether Countrywide, like Enron, exaggerated earnings, minimized debt or otherwise presented a rosy picture to the SEC. As Waxman points out, Mozilo's timing was exquisite. Shareholders, whose stock is now worth ten-cents-on-the-dollar, have a right to know whether insiders, like Mozilo, made off like bandits at their expense. New York City Comptroller William Thomson is suing 25 premier financial institutions, including Countrywide, for the loss of shareholder value in city pension funds. Thomson said that Countrywide “cashed out to the tune of almost $700 million” while shareholders watched pension funds plummet. “The obvious question is this: How can a few executives do so well when the companies do so poorly?” Waxman asked rhetorically, giving Mozilo and fellow CEOs a good old fashioned public tongue lashing.

      Waxman's emphasis on executive compensation begged the question of whether Countrywide deliberately hid from the SEC and shareholders the industry's expected decline. It's far worse if Countrywide cooked the books to maintain inflated shared prices, while Mozilo dumped his holdings. Countrywide packaged and sold its loans to investment bankers believing mortgage-backed securities were secure investments. Like junk bonds from poorly rated companies, sub-prime loans created risky.mortgage-backed investments. Defaults and foreclosures decimate the investment value of mortgage-backed securities. “Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual, like an island tribe sacrificing a virgin to a grumbling volcano,” said Rep. Thomas M. Davsis III (R-Vir.), viewing Waxman's hearing as a farce.

      Countrywide's Mozilo is today's latest version of WorldCom's Bernie Ebbers, who now sits in federal prison for looting $366 million and sending the nation's No. 2 communication company into Chapter 11 in 2002. Countrywide would have the same fate had it not been for Bank of America agreeing to buy the struggling mortgage giant for a measly $4 billion, a fraction of its peak market capitalization. “None of this makes sense to me,” said Rep. Eleanor Holmes Nortorn (D-S.C.), scratching her head about Mozilo's whopping compensation package. Harely W. Snyder, chairman of Countrywide's compensation committee, saw nothing wrong with Mozilo's retirement deal. Like other narcissistic CEOs, Mozilo ran Countrywide like his own piggy bank: Entitled to loot the company he co-founded with the late David S. Loeb for his own personal gain.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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