Why did countrywide fail

Loans to unqualified buyers are generally seen as the flame that lit the financial crisis's fuse. When housing prices began to deteriorate, borrowers defaulted in droves. That set off a panic on Wall Street, which had underwritten and securitized those loans using exotic, opaque financial instruments that lost value due to the defaults.

A liquidity crisis erupted when the overnight lending business between big banks fell apart, leading to the seminal Sept. Financiers became the villains of the crisis. Mozilo was among those marched in front of Congress to explain their actions.

Mozilo remembers the time as a horrible personal period for himself and his family, which he said was unwarranted for a company that he said merely wanted to make financing available to constituents, primarily minorities, who couldn't go to traditional banks. I hated to see my poor wife go through this.

But now that his ascension was set, his influence seemed to wane. In early , with interest rates steadily rising, Kurland sent a memo to senior managers, saying that the boom was plainly over, and that it was time for the company to tighten its guidelines and plan for reduced volume.

His memo was ignored. The two men were very different. Kurland was mild-mannered and analytical, with a laconic demeanor that masked strong emotions; Sambol was arrogant, volatile, and uninhibited. Under the existing system, banks may choose their own regulators, which in turn are funded by the fees that the banks pay; the O. Last week, the Obama Administration proposed several regulatory reforms, including the elimination of the O.

About six weeks later, Kurland sent Mozilo an emotional memo. Kurland said that he could not accept this arrangement, and that when Mozilo stepped down as C. Both were told on numerous occasions to be adults. Nick Krsnich, meanwhile, had decided to leave the company. In March, , he went to say goodbye to Mozilo. Krsnich believed that Kurland had failed in his responsibilities as president, by not reining in Sambol. Nevertheless, Krsnich told Mozilo that if the choice were between Kurland and Sambol he would unhesitatingly choose Kurland.

In early September, , the company announced that Sambol would replace Kurland as president and chief operating officer, that Mozilo would stay on as chairman and C.

Kurland left the company, where he had worked for twenty-seven years, without even sending an e-mail message to employees. Last year, along with several other former Countrywide executives, he started a new company, PennyMac, which buys and sells distressed mortgages; many people were outraged that someone who had helped create the mortgage debacle was now scavenging its remains. Mozilo had to negotiate a new contract, and focussed on obtaining his due.

So he was very, very adamant about what his compensation should be. Comp Watchers. By early , subprime defaults were rising rapidly. He appeared confident, however, that Countrywide would emerge stronger from this crisis, as it had from every other, while weaker lenders fell away.

Meanwhile, he decided that it was important for Countrywide to increase its efforts to diversify; he was interested in building up other divisions, such as capital markets. The two firms were an odd match. Dunne was widely known to be risk-averse. After suffering devastating losses in its offices in the World Trade Center on September 11th, Dunne rebuilt the company, and, by December, , it was profitable again. Where was the doubting Thomas?

Sambol rejected the idea, and Dunne ended the discussions. Kurland, schooled by Loeb, had believed that Countrywide should make only as many loans as it could promptly sell, but Sambol argued that such a policy was antiquated. As late as July, , Countrywide was originating billions of dollars of loans that one analyst estimated would likely be salable only at a loss.

A month later, Wall Street buyers abandoned most mortgage-backed securities, and the collapse of the mortgage market predicted by Krsnich finally occurred. Mozilo flew to New York to plead with the heads of J. Morgan Chase, Bank of New York, and other Countrywide creditors to continue to fund the short-term debt, known as commercial paper, which the company counted on to finance many of its loans; they refused.

This is unlike anything I even thought three months ago. Sieracki bridled at the price, and pointed out that Golden West—a big California thrift that had been sold in May, , near the top of the market—had brought almost twenty-six billion dollars.

But Mozilo was determined to close the deal. On January 11, , Bank of America announced it would buy Countrywide for four billion dollars in stock—a sixth the amount of its market value before the crisis began. A year earlier, in July, , when ithad become plain that problems in the mortgage market were widespread—affecting prime as well as subprime loans—an analyst asked Mozilo, in a conference call, whether with hindsight he would have done things differently, starting in or It would have been an insight that only, I think, a superior spirit could have had at the time.

What should I have known and when should I have known it, and what should I have done about it? The next month, the market collapsed, and the real damage began to unfold. Since then, Mozilo has had plenty of time for introspection. Unsurprisingly, he takes issue with the notion that all roads in the worldwide financial implosion lead to his doorstep.

It is true that the crisis was greater than the collapse of the subprime-mortgage market. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments.

And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit default swaps. Taken together, these amounted to the biggest asset and credit bubble in human history. Nonetheless, probably because problems with home mortgages have affected so many people, Countrywide and its C. In May, , when he was still chairman of Countrywide, pending the Bank of America acquisition, he received an e-mail from a borrower, Daniel Bailey, Jr.

Obviously they are being counseled by some other person or by the internet. A number of e-mails indicate that he was disconcerted by the way the company was operating. In the first quarter of , H. Frankly, I consider that product line to be the poison of ours.

Nonetheless, it was at about this time that he seems to have decided that he wanted Sambol, not Kurland, to succeed him.

And, in January, , in an e-mail cited in the S. Charges of insider trading may be the most difficult legal issue that Mozilo faces. As he prepared for retirement, he arranged to sell stock through what is known as a 10b plan, under which corporate executives must set the dates of their trades in advance, to protect against allegations of insider trading. Starting in late , Mozilo made several changes to his stock-trading plans, to increase the number of shares he could sell.

According to the S. Last December, Mariana Pfaelzer, the U. Mozilo always saw himself as providing mortgages to many who were like him—disenfranchised. In the past five years, millions of people who received mortgages from Countrywide, many of them the minority homeowners he had set out to assist, were hurt, not helped, by him. Last October, Bank of America promised more than eight billion dollars in loan modifications and other aid for Countrywide borrowers, to resolve predatory-lending investigations by eleven states—the largest such agreement in U.

And as real estate prices soared, borrowers proved all too eager to participate, even if it meant paying high costs or signing up for a loan with an interest rate that would jump in coming years. But few companies benefited more from the mortgage mania than Countrywide, among the most aggressive home lenders in the nation. As such, the company is Exhibit A for the lax and, until recently, highly lucrative lending that has turned a once-hot business ice-cold and has touched off a housing crisis of historic proportions.

Mozilo has ridden this remarkable wave to immense riches, thanks to generous annual stock option grants. Rarely a buyer of Countrywide shares — he has not bought a share since , according to Securities and Exchange Commission filings — he has been a huge seller in recent years. He still holds 1. Simon said Mozilo and other top Countrywide executives were not available for interviews.

The spokesman declined to answer a list of questions, saying that he and his staff were too busy. A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide. In a mid-March interview on CNBC, Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry.

But Countrywide documents show that it, too, was a lax lender. For example, it was not until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money.

And Countrywide waited until Feb. The top score is The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.