It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions

by Nomi Prins

  “I find these numbers alarming as reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis,” Schumer wrote to Rosenfeld.10

  Waxman’s committee questioned Harley Snyder, chair of the Countrywide Compensation Committee, and Mozilo on protecting shareholder interests and the convenient timing of their stock buy-backs. Waxman pointed out to Snyder that it wasn’t only Mozilo selling shares during Countrywide’s stock-buyback period. So was the board.

  “How were those sales in the best interests of the shareholders?” Waxman asked. Snyder dodged the question. “The shareholders had the same opportunity to sell their stock as we had,” he said. “Our stocks were sold . . . under a prearranged selling order . . . when stock reaches a certain price which is prearranged, pre set, that is when the stock is sold.”11 What Snyder didn’t say was that those shareholders, like Enron’s, didn’t exactly have access to the same information on the firm’s condition that the insiders did.

  Waxman pressed further. “Both [of] you in your roles as CEO and board member have an obligation to act in the best interests of your shareholders. But I am having a difficult time reconciling that issue with Mr. Mozilo’s compensation.” Mozilo, you see, had been a busy man. When the mortgage crisis started in October 2006, he filed a stock trading plan to sell 350,000 shares per month. He revised the plan twice, first in December, so he could sell 465,000 shares per month, then on February 2, 2007, to sell 580,000 shares per month.

  “That was the same day that Countrywide’s stock hit a record high of $45 a share,” Waxman said. “In total, I believe Mr. Mozilo sold 5.8 million shares for $150 million between November 2006 and the end of 2007.” Mozilo pleaded ignorance on the number and said he was selling stocks because of a prearranged retirement schedule.

  Waxman wasn’t having it. “We don’t have exact figures, but it looks like Countrywide shareholders lost all of the $2.5 billion the company spent on repurchasing shares while you were selling stock,” he said.

  Waxman then turned to Richard Parsons, who chaired Citigroup’s board of directors’ Personnel and Compensation Committee (and became Citigroup’s chairman on January 21, 2009). “If the CEO of Citigroup proposed to sell $150 million worth of stock at the same time Citigroup was engaged in a massive stock buyback, would this raise any red flags for you?” he asked.

  Parsons demurred completely and rambled a bunch of corporate mumbo jumbo:

  Well . . . we have procedures in place that would first flag it, second, cause counsel to opine on it, and perhaps more importantly to your question . . . we have a stock ownership requirement that would probably preclude the CEO, such as Mr. Prince, from doing just what your question implied. . . .

  But beyond that answer, what we would do, I am sure, is we would consult with counsel, we would consult to understand the reasons, and we would make a judgment based on the facts as we found them then.12

  In other words, trust us: before we loot the firm, we dot each “i” and cross each “t.”

  There were other nagging questions besides Mozilo’s questionable stock sales. Congressman Paul E. Kanjorski (D PA) couldn’t get his head around the high 18 percent mortgage payment failure rate that appeared as early as 2006:

  Don’t you put all those [numbers] together in statistics and say, “These packages we are selling now are failing at such a horrific rate that they’ll never last and there will be total decimation of our business and of these mortgages?”13

  Apparently, total decimation didn’t concern Mozilo. The mortgages were sold off his books long before they started to fail. How would he know about their problems? “These mortgages are put in very complex securities and have a lot of charges to them,” he responded. “So it’s very different to see a loan or series of loans, are they in that particular security or another security? The only one who would know that would be the security holder.”14

  In other words, his company’s failures weren’t related to the actual mortgages it sold. Note Mozilo’s use of the word complex. Complexity comes up as one of the most overused excuses for executives’ rise and the economy’s subsequent fall.

  Mozilo’s e mailed response in May 2008 to a mortgage holder who wrote to Countrywide asking for a loan modification was a bit blunter. Mozilo was annoyed that his customers were questioning his firm’s methods. “This is unbelievable. Most of these letters now have the same wording. Obviously, they are being counseled by some other person or by the Internet. Disgusting,” Mozilo wrote and then accidentally hit “reply” instead of “forward.”15

  Bank of America Acquires a Countrywide Can of Worms

  Condemnation for the little guy aside, it’s hard to guess what Mozilo knew about Countrywide’s subprime loans before he signed the company over to Bank of America. Did Mozilo recognize the mess he was creating and hide it? Or did he stay insulated from that, collecting his fat checks with ignorance? Four months after facing Waxman, Mozilo would walk away from his failed thrift a very rich man. The timing for dumping Countrywide into Bank of America’s lap was fortuitous for him and for Goldman Sachs and Sandler O’Neill Partners LLP, which each banked more than $12 million in advisory and contingency fees on the deal.16

  It would prove a disaster for Bank of America CEO Ken Lewis. When the deal was struck in mid January 2008, Countrywide was valued at $4 billion, and Bank of America’s share price was $38.50.17 Two weeks later, Countrywide posted a loss of $422 million for the fourth quarter of 2007.18 By the time the acquisition was completed on July 1, 2008, tumbling stock prices drove the deal’s value down to $2.5 billion.19 After eight months, $46 billion of TARP money, $118 billion in government backed asset guarantees, and a lousy merger with Merrill Lynch, Bank of America’s stock would bottom out at $3.14, in March 2009.20 But what happened after Mozilo got his takeout wasn’t something he considered to be his problem. It is possible that Mozilo believed that the impending litigation that was handed over to Bank of America and the congealing losses on Countrywide’s books had nothing to do with any abuse he imparted, but that seems a stretch.

  The deal went through, as most of the big ones do, despite Countrywide shareholder lawsuits alleging everything from insider trading and inflated loan fees to “collusion between the two companies.” 21 The suits had been mounting across the country from municipal employee pension funds and from homeowners—the very people who relied most on ethical investing practices from the big banks for their financial security. The Arkansas Teacher Retirement System brought a consolidated complaint, filed October 24, 2007, which alleged insider trading among Countrywide executives.22 In late February 2008, a class-action lawsuit filed in a Delaware court accused Countrywide of unjustly profiting from inflated fees charged to homeowners with delinquent or foreclosed homes.23

  The lawsuits also included one filed by New York State comptroller Thomas P. DiNapoli and New York City comptroller William C. Thompson, on behalf of state and city pension funds. It claimed that “unlawful actions and omissions by Countrywide deprived investors of the information needed to make prudent decisions.”24 In other words, the suit charged that Countrywide had committed mortgage fraud.

  A similar suit was brought by California attorney general Edmund Brown against Mozilo and Countrywide president David Sambol on June 25, 2008, for using deceptive advertising to lure clients into risky subprime home mortgages, then reselling those mortgages as securities and reaping huge profits. “Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers,” Brown said.25

  Countrywide settled predatory lending claims filed by eleven state attorneys general, led by Illinois and California, on October 6, 2008, and agreed to modify principal and interest rates worth $8.4 billion on nearly 400,000 loans it had initiated.26 It neither admitted nor denied any wrongdoing, and no fines were levied.27

  The settlement might have been helpful for borrowers, but
it led to a class action lawsuit from angry investors, brought in December 2008 by Greenwich Financial Services, a Westchester, New York, hedge fund. Greenwich Financial claimed that Bank of America didn’t have the right to modify Countrywide’s agreements because the loans had been bought at a discount.28 In short, no one was happy with the deal that turned into an albatross around Bank of America’s neck.

  As of this writing, Mozilo appeared to be partway to getting his just desserts. In early June 2009 the SEC charged him with fraud and insider trading. Of particular note were his internal e-mails, in which Mozilo referred to a subprime product as “toxic” and said the company was “flying blind.” The SEC reported he had cashed in nearly $140 million on his alleged insider stock sales. In addition, it charged that Countrywide made repeated exceptions to its already lax underwriting standards for mortgages without telling investors. Former president of Countrywide, David Sambol, and former Countrywide chief financial officer, Eric Sieracki, were also charged with fraud.29

  Big Bonuses and Big Layoffs

  Waxman’s committee also probed several other high-ranking executives at Countrywide, Merrill Lynch, and Citigroup. Representative John A. Yarmuth (D KY) questioned the panel of executives on whether it thought that excessive compensation in general was tearing at the very fabric of society. The executives thought no such thing. To them, excessive compensation was the fabric. Parsons, chair of the Citigroup Compensation Committee, scoffed:

  You have to be competitive. You have to be in the marketplace. And my own impression is that with all its flaws, the market economy still works best out of all the models we have out there to look at and to choose from.30

  Competitiveness in 2007, when the economy began to tank, apparently meant king size pay packages for loser executives. Chuck Prince left Citigroup with a $38 million package, plus perks like a car, a driver, an office, and an administrative assistant, all for up to five years.31 A year later, Citigroup announced that it was firing 50,000 employees worldwide.32 The firm started to make good on that promise by the fourth quarter of 2008, announcing that it had cut nearly 30,000 workers from the previous quarter.33 By March 6, 2009, the firm was on government-administered life-support, trading at a buck.34

  Citigroup employees did not exactly receive the same kind of exit package that CEO Chuck Prince did. They got a more typical and modest arrangement of two weeks’ pay for each year of service, with a maximum of a year’s worth of severance pay.35 By the end of the first quarter of 2009, Citigroup exceeded its own downsizing expectations, chopping 65,000 heads from peak levels, to 309,000.36

  Over at Countrywide, Mozilo had raked in more than $470 million in compensation and stock sales from July 2003 to June 30, 2008—the day before he resigned and the day before the Bank of America deal officially closed—the third highest compensation of any financial or home building executive during that time.

  (First place went to Charles R. Schwab, CEO of the investment bank Charles Schwab, who got more than $816 million in cash and stock sales during that time. Second was Dwight C. Schar, then CEO of NVR, Inc., a Virginia based company that builds and sells single-family detached homes, townhouses, and condos, who got more than $626 million over the same period.)37

  Employees again got the short shrift when Countrywide announced in September 2007 that it was laying off up to 12,000 workers.38 They weren’t given the same sort of perks Mozilo got in his lucrative, though downsized, retirement package.39

  Stanley O’Neal golden parachuted out of Merrill Lynch in October 200740 with a $160 million compensation package, which included $131 million in stocks and options, $24.7 million in retirement benefits, and $5.4 million in deferred compensation.41 Days before O’Neal’s resignation, the company had announced a staggering $2.3 billion third-quarter loss.42 That would later be dwarfed by a nearly $5 billion loss announced in the summer of 2008 and a total net loss of $27.6 billion for 2008.43

  Despite the staggering numbers and the executives’ brazenness, all of this wealth transfer and congressional conversation brought no legislative changes. The familiar refrain of shock and awe, followed by an uneasy legislative silence, was heard every time another piece of news on egregious compensation hit the headlines.

  What’s a Few Million in Bonuses When Your Losses Are in the Billions?

  Seven months after Mozilo and the others had been called, Henry Waxman’s Committee on Oversight and Government Reform held another hearing on October 7, 2008. This time, in the midst of a full blown economic crisis, the committee gathered to examine the reasons behind the $85 billion taxpayer bailout for AIG.44

  Once again, executive pay was a hot topic. It was disclosed during the hearing that in 2005 and 2006, while AIG was still thriving, then CEO Richard Sullivan pulled down $8.4 million in cash bonuses.45 It was a modest sum compared to the bonuses collected by some of his Wall Street brethren, but an astonishing thing happened after AIG posted a $5 billion fourth quarter 2007 net loss.

  In March 2008, while the AIG board of directors’ Compensation Committee mulled over how much to reward Sullivan and other executives for their hard work in 2007, Sullivan urged them to exclude the $5 billion in losses, which were mostly from AIG’s Financial Products Division. You know, just ignore them. The board agreed and rewarded Sullivan with a cool $5 million in cash.46 Pay for performance no longer applied. Pay for hiding losses had kicked in.

  Waxman’s October 2008 hearing also revealed that AIG executives took a $443,000 corporate retreat at the opulent St. Regis in Monarch Beach, California, a week after AIG got its $85 billion from the American taxpayers. “Check this out,” Elijah Cummings (D-MD) said, “AIG spent $200,000 for hotel rooms. Almost $150,000 for catered banquets. AIG spent—listen to this one—$23,000 at the hotel spa and another $1,400 at the salon. They were getting their manicures, their facials, their pedicures, and their massages while American people were footing the bill. And they spent another $10,000 for—I don’t know what this is—leisure dining. At bars?”

  Cummings then asked Eric Dinallo, the superintendent of the New York State Insurance Department, for his expert opinion on the rather excessive charges. Mind you, this is the man whose job it is to “ensure the continued sound and prudent conduct of insurers’ financial operations” and to “eliminate fraud, other criminal abuse and unethical conduct in the industry.”

  “Let me ask you, not as insurance commissioner [sic], but as a taxpayer, does this look right to you?”

  Astoundingly, Dinallo kind of thought it did. “I do agree there is some profligate spending there—but the concept of bringing all of the major employees together to ensure that the $85 billion could be as greatly as possible paid back, would have been not a crazy corporate decision.”

  “Well, I would tend to disagree with you,” Cummings shouted, “when it comes to pedicures, facials, manicures—the American people are paying for that.”

  “I agree.”

  “And they are very upset!”

  “I said, there are regrettable and wrong headlines in that, but the idea of making sure you can get the game plan back on track, so you can pay off the loan, is not an irrational one,” Dinallo concluded.47

  Again, let me remind you that this is the guy who was in charge of watching over the industry.48 So you can imagine what was going on inside the executive offices. At any rate, the game plan apparently never did get back on track. AIG lost an incredible $61 billion in the fourth quarter of 2008 alone, even after sucking in all that bailout money.

  AIG tried hard to pad its executives’ personal checking accounts in the same spirit of excess. Sullivan’s successor, Robert Willumstad, was the CEO of AIG for only three months, from mid June 2008 to mid September 2008, before he was forced out by then treasury secretary Henry Paulson as part of the original bailout deal.49 (Paulson installed his buddy and Goldman Sachs board member Edward Liddy as CEO at an annual salary of $1. Not that the compensation would hurt Liddy, who got $63 million from 2001 to 2005 as CEO of fellow in
surance giant Allstate.50 Liddy would appear for a separate hearing about AIG bonus payouts before the House Committee on Financial Services on March 18, 2009.)51

  Still, Willumstad was contractually entitled to a $22 million severance package. With sensibility uncharacteristic of the industry, Willumstad declined.52 “I prefer not to receive severance payments while shareholders and employees have lost considerable value in their AIG shares,” he wrote to Liddy. Willumstad and AIG also agreed in December 2008 that he would rescind one million AIG shares that were part of his deal to become CEO in the first place.53 Willumstad was one of few big name CEOs to eschew entitlement during the crisis.

  They Kept the Money