All the Devils Are Here [188]
In his inimitable way, Mozilo tried to fend off the inevitable. In the fall of 2007, Countrywide hired a public relations firm to help launch a “game plan to regain control of the agenda,” according to a memo obtained by the Wall Street Journal. Although the memo was meant to serve as talking points for another top Countrywide executive—Drew Gissinger—the pugnacious tone had all the earmarks of Angelo Mozilo.
“Our position in the industry makes us a huge and very visible target,” the memo read. “[W]e’re being attacked from all sides today in large part because we’re ♯1. Not just ♯1 overall, but for the first time in mortgage banking history, we’re ♯1 in each of the 4 major divisions—Wholesale, Retail, Correspondence, and Consumer Direct. This is what makes us such a huge threat to our competitors.”
“[I]t’s gotten to the point where our integrity is being attacked,” the memo continued. “NOW IT’S PERSONAL!... WE’RE NOT GOING TO TAKE IT.”
It ended by asking Countrywide’s employees to sign a pledge that they would “protect our house”—that is, defend the company from the growing storm of accusations about its lending practices. The stock continued to fall.
In January 2008, Countrywide hired Sandler O’Neill, a boutique investment bank, to explore its options. According to one person who was there, Countrywide CFO Eric Sieracki presented a “base-case scenario,” a “stress scenario,” and a “severe scenario.” Jimmy Dunne, Sandler’s blunt CEO, dismissed the base-case scenario out of hand. What was coming was likely to be even worse than Countrywide’s severe scenario, he said. Countrywide needed to sell. And the best—maybe the only—buyer was Bank of America. “Ken Lewis, when he covets a target, cannot say no,” Dunne said. (Lewis, the CEO of Bank of America, would become infamous for buying Merrill Lynch during the height of the crisis in a deal that was surrounded by controversy and criticism. Ultimately, that acquisition would cost him his job.)
Says one person who was there: “Mozilo and all these guys, they thought they were making widgets. They got too far away from understanding the real risk in the balance sheet. Even at the end, they were saying that things were okay. They believed it. They were crazy.”
In January 2008, Bank of America acquired Countrywide for $4 billion; less than a year earlier its market capitalization had been more than six times that amount, at nearly $25 billion. During the second half of 2007, Countrywide took $5.2 billion in write-downs and increases to loan loss reserves, according to a shareholder lawsuit later filed against the company. The write-downs essentially wiped out Countrywide’s earnings for 2005 and 2006.
Just before the acquisition, Mozilo told investors, “I believe very strongly that no entity in this nation has done more to help American homeowners achieve and maintain the dream of homeownership than Countrywide.”
Wouldn’t you know it? Moody’s and S&P downgraded Countrywide on August 16—a week after the company filed its quarterly documents with the SEC. The day before, S&P had announced that structured investment vehicles—which had hundreds of billions of dollars in triple-A-rated debt among the $400 billion outstanding at the peak—were weathering the market disruption well. (A month earlier Moody’s called SIVs “an oasis of calm in the subprime maelstrom,” according to a lawsuit that was later filed by CalPERS, the giant California pension fund.) But just a week and a half later, on August 28, Cheyne Capital Management, a $7 billion SIV, sent both rating agencies a letter notifying them that it had breached one of its requirements, and would have to wind down as a result. S&P abruptly downgraded Cheyne’s debt, including its triple-A paper. According to the CalPERS lawsuit, Moody’s didn’t react until September