Loeb’s departure hadn’t been entirely graceful. As he got older, his behavior became more erratic. In July 1999, for instance, the news broke that Loeb had sold a million shares of his Countrywide stock. High-ranking executives at publicly owned companies are never supposed to sell stock without first clearing the sale with the legal department and informing the rest of the management team and the board. Loeb had done neither. When one executive called to ask him why he had sold the stock without telling anybody, Loeb just chuckled.
After Loeb left, Mozilo seriously entertained the idea of selling Countrywide. There were lots of potential suitors knocking on his door, and he hired Goldman Sachs to find the best fit. Although Countrywide came close to selling to a big British bank—and to Washington Mutual—both deals fell apart.
Even without a sale, there were plenty of executives internally with the ambition and skill to run the company. Countrywide’s core group of executives had joined when the company was young and small. Like Mozilo, most of them lacked an Ivy League pedigree but made up for it with a combination of business savvy and fanatical work habits. Most of them had that same chip on their shoulder toward the financial establishment that Mozilo had. That attitude was ingrained in the culture of the company and was a big part of the reason why Countrywide was always striving to outdo the big boys—even after it had become one of the big boys. For Countrywide’s top executives, that deep-seated need to prove themselves never completely went away.
Chief among these executives was Stanford Kurland, a graduate of California State University Northridge, who was hired by Countrywide in 1979 after spending the early part of his career as Countrywide’s auditor. Kurland had an intense, bookish demeanor and a slow, almost hesitant way of speaking that served to mask his deep emotion and strong will. In 1995, he became the chief operating officer of Countrywide Home Loans, the prime mortgage division that had always accounted for the bulk of Countrywide’s business; four years later, Kurland became the division’s CEO and joined Countrywide’s board. In 2004, he became president and chief operating officer of the parent company. To the employees, he was as much the boss as Mozilo. “It was always ‘Angelo and Stan want to do this,’” recalls a former executive.
Kurland was the one who took on the tasks that Loeb had always handled, making sure that Countrywide’s increasingly intricate plumbing worked perfectly. This was no small task at a company that was funding tens of billions of dollars’ worth of loans every month. “He was the inside guy, the numbers guy, the operations guy,” says a former analyst. In 2000, Paine Webber analyst Gary Gordon wrote a report celebrating Countrywide’s “wonderful discipline.” That discipline was very much Kurland’s doing, and he took great pride in it. He’d later tell people that while he was there, “there was never a single issue.” He was right. Other mortgage originators occasionally had trouble with funding or the sale of their loans. Countrywide never did.
Kurland also pushed Countrywide to diversify. He wanted Countrywide to be one of the most admired financial services providers in the country, not just a big mortgage maker. To that end, Countrywide bought a bank in 2000. Because the bank was regulated by the Office of the Comptroller of the Currency, Countrywide itself became a bank holding company, which was supervised by the Federal Reserve. Kurland used to tell people that being under the supervision of the country’s two most important bank regulators gave Countrywide extra credibility.
The purchase of the bank also forced Mozilo to leave the board of another bank, a subprime lender called IndyMac, based in Pasadena. IndyMac, which would be taken over by the FDIC during the financial crisis, had begun life as Countrywide Mortgage Investments. Founded by Mozilo and Loeb, it was a real estate investment trust, or REIT, that served as an outlet for Countrywide’s so-called jumbo loans, the ones that were too big for the GSEs to buy. (REITs pay out most of their profits as dividends to their shareholders.) Starting in the early 1990s, it began to aggregate loans from other lenders and turn them into mortgage-backed securities. It also began to originate its own Alt-A mortgages. In other words, the company was starting to compete with Countrywide. Despite the growing conflict, Mozilo stayed on the board (as did Loeb), exercised stock options, and collected some of the company’s rich dividends. His son Mark began working there in 1996. And when Mozilo finally left the board after Countrywide bought a bank, it was because he had no choice. IndyMac also owned a bank, and bank regulations don’t allow anyone to serve as a director on two bank holding company boards. When Mozilo stepped down from the board, IndyMac forgave an outstanding $3.3 million loan and paid him another $3.6 million to cover any taxes he might owe on his stock options.
Taking the money was an outrageous move—and to some at Countrywide, a sign that money was starting to matter too much to Mozilo. In 2000, he owned 2.8 million shares of Countrywide stock (including options) and would take home $6.6 million in compensation—a number that would rise to $10.1 million by 2001 and $23.6 million by 2003. Yet he wanted more. “There are CEOs of companies to whom the most important thing is if they made more than the next guy,” says someone who knew him well. “Mozilo was getting caught up in all of that.”
If Stan Kurland was in charge of Countrywide’s plumbing, a very different kind of executive was in charge of producing all of its loans. His name was David Sambol; he had joined Countrywide in 1985 and become its head of loan production in 2000. (He was named chief operating officer for the home loan division in 2004.) Like Kurland, Sambol had gone to California State University Northridge and had worked briefly as an accountant. For many years, the two men appeared to be friendly. They were both highly intelligent, proud men who cared deeply about Countrywide’s standing and its market share goals. About Sambol, a former executive says, “he bled Countrywide.” But there the similarities ended.
Sambol was a super-aggressive salesman, very much in the Mozilo mode, though he lacked Mozilo’s charm and warmth. He did not always make a good first impression. “His style was one of attack,” says a former executive. “He would attack everything around him that didn’t report to him. He would be relentless, and very convincing until you challenged him with facts. But when you called him out, it never bothered him. It rolled right off his back and he was on to the next thing.” This aspect of Sambol’s character gave rise to an internal nickname: Teflon Dave. Another former executive who was a fan of Sambol’s says, “He loved the details, he loved knowing the details, and he loved putting people through the wringer to see if they knew the details.” People also made fun of his dictatorial nature. Other executives would pretend they were Sambol and say to each other, “You don’t understand. You’re not capable of understanding. I see all of the colors of the rainbow.”
Inside Countrywide, it was very apparent that Sambol was “all about building his own kingdom,” as a former executive puts it. He was dismissive of everything that he hadn’t personally created. And while one former executive says that Sambol did care about risk, above all, Sambol wanted to win.“There was a clear mentality from his organization that these [subprime] guys are outcompeting us, we’ve got to do this, we just lost another loan,” recalls a former executive. Soon after taking charge of the sales force, Sambol made several changes aimed at putting Countrywide on a more even footing with its subprime competitors. The most important of these was to the compensation system: instead of taking home a flat salary, loan officers would earn commissions based on volume, according to the American Banker.
There was always friction at Countrywide between those who worried about risk and controls and those who wanted to sell more loans. But for a long time, the friction was manageable, maybe even healthy. “Really great organizations have friction,” says another former executive. “But friction can become cancerous.”
For Countrywide, the friction started to become a sickness in 2004, when the Federal Reserve began to raise interest rates. Normally, rate increases signal that it’s time for mortgage originators to pull back on loan production.
But in this new world, loan production did not decline. Those, like Kurland, who worried that higher rates brought increased risks of default felt as though they were trying to hold back a flood. In lighter moments, they began to joke that they were becoming the CNOs—the chief nuisance officers. Kurland complained to confidants that on some days he felt his role was increasingly being relegated to that of the “no” guy. “The people who are propelled upward in many cases in corporate America are the guys who said yes to an idea that worked,” he later told a friend. “The guys who said no to a big failure—there’s no list for that. That’s why we end up with bubbles.”
When Countrywide had first moved into subprime lending back in the late 1990s, Kurland and Mozilo had both believed that the market was moving toward risk-based pricing, and the lines between prime and subprime were going to go away. And they convinced themselves that Countrywide would establish standards that would keep the truly troubled borrowers away, while capturing the more creditworthy subprime borrowers, those who were just a step below prime. Initially, the company was very careful.
Kurland issued three rules for subprime lending at Countrywide, according to several former executives. First, all of its subprime loans had to be sold, by which he meant the entire thing, including the residuals that most subprime companies held on their books. Second, the borrowers had to either make a 20 percent down payment or get mortgage insurance to cover the first 20 percent of the loan. Finally, Countrywide couldn’t offer any subprime loan products that had a higher probability of default than an FHA or VA loan.
These rules, however, seemed to constrain the company less and less as time went on—and whatever reservations Mozilo had about subprime lending seemed to fade the bigger the market got. Within a few years of making subprime loans, Countrywide could offer an astonishing 180 different products. In 2004, the American Banker accused Mozilo of sounding like a “carnival barker” as he listed some of them: “We have ARMs, one-year ARMs, three-year, five-year, seven- and ten-year. We have interest-only loans, pay option loans, zero-down programs, low or no-doc programs, fast and easy programs, and subprime loans.” Sambol told investors that “it’s our intent to carry every product or program for which there is reasonable demand…. [I]f your customer can legitimately qualify for a loan anywhere else in the U.S., they’ll qualify at Countrywide.” In a complaint the SEC later filed against Mozilo, Sambol, and former CFO Eric Sieracki, the agency alleged that Countrywide referred to this as its “matching” strategy: if a competitor offered a loan product, Countrywide would match it.4
Besides, with Wall Street willing to buy anything, mortgage issuers willing to guarantee anything, and estimates about the probability of default open to assumptions, Kurland’s rules could be rendered basically meaningless. Indeed, one former executive says that if he could go back and do one thing differently, he would look at the models about how loans were supposed to perform and say, “I’m not going to believe them.”
“We had meetings where I would say, ‘Are you sure you’re comfortable with that?’” says this person. “And they would bring in the quants!” And so, the matching strategy came to mean that Countrywide repeatedly loosened its guidelines for both the loans its own sales force originated and the loans it purchased from others, according to the SEC. Other subprime companies, for instance, adopted a loan strategy called risk layering, in which two or three different risks—no-doc, adjustable-rate, credit-impaired borrower—were wrapped together in one loan. These were risks that were never meant to coexist, and blending them greatly increased the chances of default. Yet since Countrywide’s competitors were making risk-layered loans, Countrywide made them, too. It was madness. “Subprime one was just really high rates for borrowers with bad credit,” says Josh Rosner. “That’s different than the loan itself being a bad product.”
“When you are the biggest, you have a responsibility to not give credibility to bad products—whether you’re Countrywide, Fannie, Freddie, or any of the big mortgage lenders out there that were doing this,” says a former Countrywide executive. Countrywide did just the opposite: by mimicking the products of competitors, no matter how dangerous, it gave them an imprimatur they didn’t deserve.
There was a final problem with the company’s subprime guidelines. If a borrower couldn’t meet the guidelines, Countrywide would try to make the loan work anyway. This was not some rogue effort by aggressive branch managers to sidestep the rules. It was the rule: Countrywide called it the exception pricing system. Every lender had some version of this, but, according to the SEC, Countrywide “liberally” used its exception policy for loans that didn’t fit into even the loosened guidelines. One former Countrywide executive says that Mozilo told the sales force to listen to Sambol, not Kurland; in its complaint, the SEC corroborates that in part, saying the company’s rules about a kind of subprime loan known as an 80/20—the customer took out two loans in order to borrow 100 percent of the money needed to purchase a home—“were ignored by the production division.”
In 2005, John McMurray, Countrywide’s chief risk officer, wrote in an e-mail to Sambol, “As a consequence of [Countrywide’s] strategy to have the widest product line in the industry, we are clearly out on the ‘frontier’ in many areas.” The “frontier,” McMurray added, had “high expected default rates and losses.”
Those in the industry could see the change, even if Mozilo still refused to acknowledge it. Says a former industry executive: “Roland [Arnall] thought he [Angelo] was a hypocrite. It was an odd thing, Countrywide acting holier than thou. Countrywide was in the same game.”
But to the outside world, the picture couldn’t have seemed more glorious. By the end of 2004, Countrywide had leaped in front of Wells Fargo to be the nation’s largest mortgage company. It originated a stunning $363 billion in mortgages that year. A year later, Countrywide originated almost $500 billion in mortgages. Sambol and other executives had taken to telling investors that Countrywide expected to originate $1 trillion worth of mortgages by 2010. They were halfway there.
It was pointless to expect Washington to do anything to stop the abuses that characterized subprime two. In addition to Ned Gramlich, the only people in Washington who seemed to care about the issue were Senator Paul Sarbanes and Sheila Bair, the assistant secretary of the Treasury for financial institutions during the first few years of the Bush administration. But as a Democratic senator, Sarbanes had no leverage in the Republican-dominated Senate. And Bair, a moderate Republican from Kansas, didn’t have much leverage, either. Realizing that pushing for new regulation was futile, she tried to get the industry to write a voluntary code of conduct for subprime lending. She chaired a big meeting that included Ameriquest, Citibank, J.P. Morgan, Countrywide, and others. But that idea soon petered out. “The problem,” says one former regulator, “is that they were all making too much money.”
So it was left to local officials to try and stop the abuses. And try they did. But at every level, those who took on the lending machine found themselves stymied by lender lobbying and federal bank regulators who actively—and successfully—sought to thwart local officials. It would be hard to imagine a more telling example of how the nation’s bank regulators had become captive to the institutions they were charged with regulating.
Take Cleveland, which had been hit hard by the first subprime bubble and feared the consequences of a second bubble. In 2001, the city council passed a law banning balloon payments and mandating counseling for borrowers who were seeking certain loans. The law also required lenders to submit key information, including the total points and fees paid on each loan. In response, the Ohio state legislature, which was controlled by Republicans, passed its own, much meeker law, saying that only the state had the right to regulate lending. Mortgage lobbyists proudly acknowledged that they had largely written the state’s bill. Then a group of lenders called the American Financial Services Association sued Cleveland, arguing that the city’s law was now illegal. A court ruled in favor of the AF
SA in 2003; Cleveland’s law was overturned.
That same story played out in Oakland, Los Angeles, and elsewhere. Communities tried to strengthen state laws that had been watered down by lender lobbying, only to face lawsuits from the AFSA. The AFSA dubbed this its “municipal litigation” program; in most of these battles, the AFSA’s most public spokesman was its Ameriquest representative. From 2002 to 2006 Ameriquest, its executives, and their spouses and business associates donated at least $20.5 million to state and federal political groups, according to the Wall Street Journal.
States that wanted to do something about subprime lending didn’t fare much better. In the fall of 2002, Georgia governor Roy Barnes, a Democrat, signed into law the Georgia Fair Lending Act, which prohibited loans from being made without regard for the borrower’s ability to repay. It also provided “assignee liability,” meaning that the investment bank that securitized the loans—and the investors who wound up owning the mortgage—could both be sued if the loan violated the law. The outcry was instantaneous. Mozilo called the new law “egregious.” Ameriquest said that it could no longer do business in Georgia. A group of Atlanta lenders filed a class action lawsuit. The rating agencies jumped in on the side of the bankers, with S&P and Moody’s both saying they would no longer rate bonds backed by loans that were originated in Georgia.
But the most crushing blow came from the national regulators—especially the Office of Thrift Supervision and the OCC, which oversaw roughly two-thirds of the assets in national banks. Siding with the banks against the states and cities that were trying to stop abusive lending, the two federal regulators asserted something called preemption. What that meant, in effect, was that institutions that were regulated by the OTS or the OCC were immune from state or local laws. In theory, preemption makes sense—companies always want to be able to play by one set of rules, instead of having to adapt to fifty different laws in fifty different states. Federal preemption basically says that federal rules always take precedence over state rules.
All the Devils Are Here Page 20
