Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [51]
The Fed’s terms mirrored those that nervous investors refused when they stopped buying Countrywide’s debt.The Fed bailed Countrywide out of its liquidity problems by lending to the banks who lent to Countrywide using Countrywide’s collateral to back the loans. This massive liquidity bailout was the first Fed bailout related to the subprime mortgage lending crisis (as far as I know). The Federal Reserve Bank could have exercised its authority to demand Countrywide modify mortgage loans.The Fed was a pushover. Ben Bernanke had dangled raw meat in the face of hungry wolves. More bailouts were coming.
Investors felt pressure from all angles. Quant funds reported losses. I told CNBC’s Carl Quintanilla that quant funds put on Dead Man’s Curve trades, and “model masturbation makes quants go blind.”Warren Buffett and Charlie Munger warned this would happen. They talk about value and price; they don’t talk about betas, correlations, and volatilities. Steve Forbes of Forbes magazine opposed any bailouts. He noted the Fed had kept rates low, fueling the problem. He cautioned that we should “resist the temptation to bail these people out,” and specifically referred to the Fed’s bailout of Long-Term Capital.27
On August 17, 2007, CNBC aired a series of stories that Warren Buffett might be eyeing Countrywide, but they were all incorrect stories. 28 “It is better to be a bad manager of a good business,” Warren always says, “than a good manager of a bad business.”29 He seeks good managers of good businesses. I told the Journal Inquirer that the Fed should have asked Countrywide for a quid pro quo in exchange for the bailout: “Given Countrywide’s contribution to the problems in the mortgage loan market, and given company head Angelo Mozilo’s denial of that role, the Fed should have pressured Countrywide’s board to replace him.”30 Warren wrote me that he agreed with my comments.
Less than a year after the August 2007 bailout, Daniel Bailey Jr. got a surprise email reply after asking Countrywide to modify the terms of his adjustable rate mortgage. Bailey Jr. wrote he had not understood how the loan worked; he had been told he could refinance after a year; and now he cannot deal with the payments. Mozilo apparently hit “reply” rather than “forward” when emailing. Mozilo wrote it is unbelievable that most of the letters Countrywide receives seem like form letters. “Obviously they are being counseled by some other person or by the Internet. Disgusting.”31
I can understand the email SNAFU. One Saturday, I sent my nephew, Kenneth, a link to a cheesy but oddly entertaining David Hasselhoff video.Three hours later, Kenneth C. Griffin, CEO of Citadel Investment Group, replied, “Did you hit my address by accident?” I know Ken Griffin is a gentleman. He promised not to embarrass me by revealing my mistake. I now also know we are both fans of KITT (Knight Industries Two Thousand), the talking car in Knight Rider. KITT protected Michael Knight, Hasselhoff ’s character, but no one seems to protect borrowers from predatory lenders. I understand how easy it is to miss-send an email. But I cannot understand why Mozilo was still CEO of Countrywide and in a position to send it. Mozilo stayed on as Countrywide’s CEO until the week after its acquisition by Bank of America was approved by Countrywide’s shareholders on June 25, 2008.32