by John M. Curtis
(310) 204-8700

Copyright June 5, 2009
All Rights Reserved.

           Charging 70-year-old former Countrywide CEO Angelo Mozilo and two other executives with civil securities fraud, the Securities and Exchange Commission tried to redeem itself for dropping the ball in the Bernard Madoff case.  Despite warned repeatedly about Madoff, the SEC fell asleep at the switch allowing investors to be bilked out of $65 billion, decimating some of the nation’s biggest charities and private universities.  Yet the SEC comes an hour late and a dollar short charging Countrywide’s macho CEO with deliberate deception and insider trading.  SEC enforcement officer Robert Khuzami said Mozilo “deliberately misled” investors while he, 49-year-old chief operating officer David Sambol and 52-year-old ex-chief financial officer Eric Sieracki liquidated their stock holdings before Countrywide’s business fell apart and its stock collapsed.   

            Countrywide Financial, founded by Mozilo and partner David Loeb in 1969, grew to the nation’s leading mortgage lender by 2006, originating 20% of all U.S. home loans.  Countrywide’s business grew dramatically in 1999 when former President Bill Clinton pressured Fannie Mae and Freddie Mac to lower lending standards, enabling more borrowers to qualify for home loans.  Prior to 1999, Fannie Mae and Freddie Mac required what’s known a “full documentation,” typically proof of income, e.g., pay stubs or tax returns.  When they dropped those requirements, it opened the door for subprime mortgage lenders, like Countrywide, to offer products to a much larger slice of the population.  Khuzami now blames Countrywide for shoddy lending practices, placing otherwise unqualified high-risk borrowers into creative mortgages, e.g., teaser-rate, adjustable rate loans.

            Mozilo may have indirectly contributed to the subprime meltdown by dramatically increasing the numbers of subprime mortgages but it was former New York Governor Mario Cuomo, while serving as Clinton’s Secretary of Housing and Urban Development, that pushed hard to have Fannie Mae and Freddie Mac open the door to less qualified borrowers.  Countrywide picked up the ball and ran with the more relaxed government lending standards.  Whether Mozilo improperly liquidated his Countrywide holdings is anyone’s guess.  SEC’s Khuzami insists that Mozilo “was actively taking his own chips off the table,” by selling since 2006 $140 million in company stock.  Company officers have every right to liquidate holdings as long as they follow a prearranged 10b5-1 trading plan.  While it’s true Mozilo changed his plan in 2007, it’s also true it might have been appropriate and legal.

            Countrywide’s lending practices conformed to industry standards set by the Clinton administration to make home ownership more available to otherwise unqualified borrowers.  “Making groundless allegations and losing in court will not help the SEC restore its reputation,” said Sambol’s attorney Walter Brown, intending to mount a rigorous defense.  Years of loose borrowing practices approved by Fannie Mae and Freddie Mac led to trillions of dollars in mortgages sold into the secondary market.  While Fannie Mae and Freddie Mac lowered lending standards, Clinton signed into law the Gramm, Leach, Biley Act in 1999, repealing the 1933 Glass Steagall Act, that banned banks from reckless stock market investing.  It was highly speculative derivative investing—risky mortgage-backed securities—that eventually broke U.S. financial markets—not subprime mortgages.

            Mozilo & Co. probably saw from the inside the end of the bubble, not only with Countrywide but with the entire industry.  No one prosecuted former President George W. Bush for dumping his holdings in Harkin Energy in 1984, sending the company into a nosedive.  Scapegoating Mozilo won’t fix the SEC’s lax oversight nor will it reverse Gramm, Leach, Biley that permits bank holding companies to engage in reckless stock market investing.  When the derivative’s market went bust in Dec. 2007, investors lost their shirts, freezing credit markets.  That’s not all that different than what happened to Madoff.  Mozilo symbolizes to the subprime mortgage crisis the same piracy as Enron’s former CEOs Ken Lay and Jeffrey Skilling.  Whether or not Mozilo pulled the same fraud as Lay and Skilling is anyone’s guess.  While the SEC goes back to doing its job, it should also take some responsibility.       

             SEC officials shouldn’t act like “the pot calling the kettle black.”  They should take a serious inventory of how their own rules allowed bank holding companies to engage in reckless stock market speculation.  SEC officials should also take some responsibility for dropping the ball in the Madoff case.  Investors have a right to sue the SEC over failing to perform adequate oversight.  Before Khuzami refers Mozilo’s case to the Justice Department, he should look at how the SEC contributed to the nation’s recent financial crisis.  It’s a big stretch for the SEC to blame Mozilo or Countrywide for the subprime mortgage crisis when relaxed lending standards started during the Clinton administration.  If Glass Steagall were still in place, banning depository institutions from risky stock market investing, it’s possible the subprime crisis wouldn’t have spread to banks and other financial institutions.

About the Author

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

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