All the Devils Are Here [187]
And the entire market for asset-backed commercial paper—a market of more than $1 trillion worth of securities, and the primary means by which originators financed mortgage lending—began to seize up. Goldman Sachs chief risk officer Craig Broderick later explained in a presentation to the firm’s tax department that between August and October 2007, the “unprecedented loss of investor confidence” had quickly shrunk the asset-backed commercial paper market by more than 30 percent. “For someone who has seen this market grow on a stable, steady basis for as long as I’ve been in the business, this is really remarkable,” Broderick said.
Suddenly, no one wanted anything to do with securitization, or any form of asset-backed commercial paper, or anything that depended on credit ratings. In the all-important repo market, the “haircuts” on asset-backed securities began to increase, from between 3 and 5 percent in April 2007 to 50 and 60 percent by August 2008, according to an IMF report. “The market began searching for anything that smelled like something it didn’t like,” said one banker.
Most companies file their official quarterly documents with the SEC several weeks after announcing their results to Wall Street. Thus it was that on August 9, several weeks after its disastrous conference call, Countrywide filed its quarterly report with the SEC. In it Countrywide cited “unprecedented market conditions” and wrote that while “we believe we have adequate funding liquidity... the situation is rapidly evolving and the impact on the Company is unknown.” The next day, Countrywide held a special board meeting, the board members participating by phone. Countrywide had always assumed that in desperate times it would be able to pledge its prime mortgages as collateral for a loan. But they couldn’t. Street firms “in almost every case had a very large exposure to mortgages,” as Countrywide treasurer Jennifer Sandefur later put it, and they didn’t want more. Plus everyone was suddenly asking Wall Street for money. “It was an Armageddon... scenario,” Sandefur said. “It was—you know, a worst-case scenario of kind of epic proportions.”
As soon as he read Countrywide’s filing, Kenneth Bruce, the Merrill Lynch analyst who followed the company, knew that it was at risk. “Liquidity Is the Achilles Heel,” read the headline of his report to his clients. “We cannot understate the importance of liquidity for a specialty finance company like CFC,” wrote Bruce. “If enough financial pressure is placed on CFC”—Countrywide’s ticker—“or if the market loses confidence in its ability to function properly, then the model can break.” His shocking conclusion: “[I]t is possible for CFC to go bankrupt.”
Within days, Countrywide drew down its entire $11.5 billion credit facility—an obvious sign of desperation. It also tried to get the Fed to use its emergency lending authority, but the Fed refused. Maybe things would have been different if Countrywide were still regulated by the Fed. But it wasn’t. “They burned their bridges,” says one person who is familiar with the events.
On August 23, 2007, shortly before the market opened, Countrywide announced that Bank of America would invest $2 billion, giving the market the confidence that Countrywide had access to the deep pockets it needed to keep running. (Ironically, the bank had loaned Mozilo $75,000 in 1969, allowing him to start up Countrywide.) In an interview with CNBC’s Maria Bartiromo, Mozilo blasted Bruce’s report: “[T]o yell fire in a very crowded theater where you had, you know, panic was already setting in... was totally irresponsible and baseless.” He added, “At the end of the day, we’re the only game left in town.”
After watching Mozilo, Kerry Killinger sent an e-mail to Steve Rotella, Washington Mutual’s chief operating officer. “By the way,” he wrote, “that great orange skinned prophet from Calabasas was in fine form today on CNBC. He went after the analyst at Merrill,