Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [53]
I agree with O’Neal’s words on the face of it. It’s great to have an open mind, but don’t leave it so open that your brains fall out. O’Neal might have added that taking foolish risks and then failing to examine risk in one’s own portfolio makes for poor financial management. CEOs can read the newspapers just like anyone else, and the implosion of mortgage lender after mortgage lender was well publicized.Warren Buffett is a voracious analytical reader, and he told me that he considers risk management one of his key responsibilities as CEO of Berkshire Hathaway.
If O’Neal did not have time to read the papers, he might have asked a few more questions of his managers about Merrill’s involvement with failed mortgage lenders like Ownit. How could Merrill resell or securitize those loans and earn the same profits healthy loans produce?
The Department of Justice and the Federal Bureau of Investigation (FBI) issued a press release on June 19, 2008: “From March 1 to June 18, 2008, Operation Malicious Mortgage resulted in 144 mortgage fraud cases in which 406 defendants were charged.” Cases have been brought across the United States with losses of approximately $1 billion induced by alleged fraud.37
When Bank of America Corp agreed to buy Countrywide in January 2008, the all-stock transaction was valued at $4 billion. By the time Countrywide’s shareholders approved the sale on June 25, 2008, the shares of Bank of America had slumped and the value was around $2.8 billion. But Bank of America may not have gotten a bargain. Also on that day, Illinois, California, and Washington State Department of Financial Institutions filed lawsuits against Countrywide, and other states soon followed.3839 Illinois Attorney General Lisa Madigan was the first to file, and the Illinois suit named Angelo Mozilo in addition to Countrywide. She noted that Mozilo has assets. She alleged there was a “pattern of deception.” Countywide had the “worst practices” and the “highest volume” of troubled mortgage loans in Illinois, and the “most toxic product (option ARMS), which she said makes up one-third of Countrywide’s portfolio. “Countrywide broke the law. Homeowners did not.”40
Eric Mozilo, the CEO’s son, blamed the media, protesting, “All we try to do is put people in homes.”41 He may be correct. That may be all Countrywide did for many borrowers. But if that is all Mozilo was trying to do, he would have served many borrowers better by inviting them to stay overnight at his place. Giving someone a bad mortgage loan only puts someone in a home temporarily, and, left many borrowers worse off than before they ever heard of Countrywide.
Countrywide set up IndyMac (Independent National Mortgage) in 1985. The two thrifts split in 1997 and became competitors. In July 2008, IndyMac became the third largest bank to fail in the history of the United States, and in September 2008, $307 billion Washington Mutual (Sold to J.P. Morgan) became the largest to fail. The Federal Deposit Insurance Corporation (FDIC) is drawing on its $53 billion deposit-insurance fund.
Thrifts are regulated by the Office of Thrift Supervision (OTS). John Reich, head of the OTS, seemed to think U.S. Senator Charles E. Schumer bore some responsibility for IndyMac’s failure because the senator wrote a letter to the OTS with concerns about IndyMac’s solvency. He also made it public, which in my opinion is like yelling “Fire! ” in a crowded theater. In my mind, it also begged the question as to why Senator Schumer did not seem compelled to speak up earlier about predatory lending and problems at other institutions—say, Fannie Mae, Freddie Mac, or Countrywide. Senator Schumer countered that if the OTS had reigned in Indy Mac’s “poor and loose lending practices,” the thrift would not have failed, and that the regulator should “start doing its job.”42 Instead of acting like a sheriff of Mortgage Lenders, the Office of Thrift Supervision behaved like the sheriff of Nottingham.