All the Devils Are Here [136]
By comparison, the fact that the loans were getting worse and worse was a nonissue. Who cared? Regulators and executives alike assumed they had kicked the can to someone else—namely, the investors who purchased the mortgage-backed securities where most of these loans wound up. In a 2005 memo about Washington Mutual, the FDIC summed up the prevailing sentiment: “Management believes, however, that the impact on WMB [of a housing downturn] would be manageable, since the riskiest segments of production are sold to investors, and that these investors will bear the brunt of a bursting housing bubble.”
And what did Wall Street think about the way the subprime business had gone mad? Wall Street didn’t care, either. If anything, Wall Street was encouraging the subprime companies in their race to the bottom. Lousier loans meant higher yields. “A company would come to us and say, ‘We can’t believe your FICO doesn’t go to 580,’ ” recalls a former Morgan Stanley executive. “ ‘You’re 620, but Lehman will go to 580.’ ”
Here was the ultimate consequence of the delinking of borrower and lender, which securitization had made possible: no one in the chain, from broker to subprime originator to Wall Street, cared that the loans they were making and selling were likely to go bad. In truth, they were all taking on huge risks in granting these terrible loans. But they were all making too much money to see it. Everyone assumed that someone else would be left holding the bag.
15
“When I Look a Homeowner in the Eye...”
By 2006, there was a distinct Dr. Jekyll and Mr. Hyde-like quality to Angelo Mozilo. The good Angelo had been warning for a surprisingly long time that his industry was heading into dangerous territory. “I’m deeply concerned about credit quality in the overall industry,” he said in the spring of 2005. “I think that the amount of capacity that’s been developed for subprime is much greater than the quality of subprime loans available.” A year later, he said to a group of analysts, “I believe there’s a lot of fraud” in stated-income loans. And he flatly told CNBC’s Maria Bartiromo that a housing recession was on the way. “I would expect a general decline of 5 percent to 10 percent [in housing prices] throughout the country, some areas 20 percent. And in areas where you have had heavy speculation, you could have 30 percent,” he said.
The bad Angelo insisted that none of this would be a problem for Countrywide. Countrywide wasn’t just some fly-by-night subprime lender; it was “America’s Number One Home Loan Lender!” Mozilo and other executives repeatedly stressed the high standards that Countrywide used to make its mortgages. Countrywide’s “proprietary technology” would help it “avoid any foreclosure,” Mozilo told investors, according to the Los Angeles Times.
Inside Countrywide, however, Mozilo was not so sanguine. In the spring of 2006, he wrote an e-mail describing Countrywide’s 80/20 subprime loan as “the most dangerous product in existence and there can be nothing more toxic.” Around the same time, Mozilo sent another e-mail saying that he had “personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan [s].” He clearly seemed worried.
The discrepancy between private worry and public proclamation would later cause the SEC to charge Mozilo and several of his top aides with fraud for not disclosing Countrywide’s growing risks to investors. In Mozilo’s case, the government also charged him with insider trading: from November 2006 through August 2007, he got total proceeds of almost $140 million from cashing in stock options. A judge overseeing a class action lawsuit filed against Countrywide wrote in one ruling that it