Just four days before Angelo Mozilo’s securities fraud and insider trading trial was to begin in Los Angeles, the former CEO of now-defunct Countrywide, settled the SEC’s claims against him for 67.5 millions dollars, resulting in the first personal punishment for a prominent executive who engaged in reckless and grossly negligent behavior during the subprime mortgage boom and bust. Mozilo raked in hundreds of millions of dollars in ill-gotten gains during his company’s foray into the subprime mortgage markets.The settlement consists of 45 million to disgorge ill-gotten profits and 22.5 million as a penalty. Despite the hefty sound of the fine, the total settlement represents a drop in the bucket of what some have deemed obscene profits earned by Mozilo during 2000 to 2008. Countrywide’s bread and butter during the subprime boom was the incredibly risky zero-down, negative amortization, adjustable rate mortgages. Mozilo earned 500 million during this 8 year period. Amazingly, of the 67.5 million penalty, Mozilo will only be responsible for paying the 22.5 million in ill-gotten profits. Insurance and Bank of America (successor to Countrywide) will pay the remaining 45 million, based on various indemnification agreements. So, at bottom, Mozilo received more than $500 million in compensation and bonuses while driving Countrywide into the ground and defrauding shareholders, yet will only be forced to disgorge 22.5 million of his personal fortune, and agreeing to a ban from ever serving again as a corporate executive. A small price to pay for recklessly leading Countrywide into bankruptcy.
The record-setting default rates for these terrible mortgage products caused not only the demise of Countrywide, but contributed significantly to the near collapse of U.S. financial markets. Mozilo himself described these loan products as, “poison” and “toxic” in emails to other Countrywide execs in 2006, signaling that he could readily foresee the collapse of the company that he was leading, but Mozilo chose to continue to enrich himself by defrauding investors and shareholders recklessly.
Bank of America eventually acquired Countrywide in 2008 in a fire sale.
Unfortunately for the Americans out there who had decided to go about achieving the “American Dream” in an honest manner their promising virtues were not offered reprisal by the likes of the SEC when Mozilo was given a slap on the wrist for his fraudulent acts. At a minimum, the SEC gave future scoundrels incentive to conceive of conniving ways to inflate their net worth at the expense of law-abiding individuals. In a semi-perfect society the government is suppose to protect those that obey the rules by punishing those that do not. The SEC disastrously fumbled the ball here, and fortunately for Mozilo, he was given the turnover. If it were possible, I would throw out my red challenge flag and demand that the SEC review this play.
ReplyDeleteI agree with G.P. that the penalty imposed was insignificant at best. However, i dont agree that this crises occured because of the few dishonest people at the top.
ReplyDeleteThe "good and Honest" americans that fought hard to get a mortgage are still enjoying that mortgage even in todays market. While it is harder for them to keep paying the mortgage is another story.
The americans "and most importantly the non-americans" that took advantage of the negative am. financing structures or non-recourse 0 down loans with the intention of either flipping, or exploiting the credit system in a way that is usually reserved for day traders are the real culprits of this mess.
There is no doubt that Mozilo knew that what Country Wide was offering was bound to collapse due to this phantom equity being portrayed into the market, the problem was that it only became a material problem when the flippers, defrauders and not so honest americans decided that it was time to cut their losses and stop making payments.
I do not agree with putting all the blame on just one person. Yes, Mr. Mozilo used the system and should not have earned so much money at the expense of the defrauding investors and shareholders. However, I do think a lot of people allowed themselves to become victims of the mortgage crisis.
ReplyDeleteThe American dream is to become a home owner, but that does not mean at any expense. Clearly a lot of people were not eligible to become homeowners but they fell in love with beautiful houses and decide they will get it no matter what. A lot of this mortgage problem has to do with people who thought they could live beyond their means.
I realize a lot of people have lost their jobs and I sympathize with them. Many of them have not even been able to get help from mortgage companies in reducing their mortgage payments. Maybe there should be a way to use the all the monies these executives have made and help those people how have honestly tried but failed due to no fault of their own.
Undoubtedly, Angelo Mozilo shrewdly opted to settle prior to going to court against the SEC. Mozilo would have surely paid out more had the decision been left up to a Jury. It is also true that his settlement was minor compared with his total earnings while at Countrywide. Americans have become akin to blaming the BIG banks and the C-Level executives for engaging in predatory lending practices and for the recession and for the bail outs and for just about everything else. The truth of the matter is that BOTH the SEC and the Bank dropped the ball in during this mortgage fiasco.
ReplyDeleteBut I would like to propose a third culprit. A culprit that Americans don’t really like to blame…… OURSELVES!!!
Yes, incredibly I believe that the American public who KNOWINGLY bought houses they could not afford are to blame as well? Didn’t the people who got these mortgages think for half a second “hey, maybe I won’t be able to make the payments on a Million dollar home when I only make $40,000 a year”.
Although, I agree that the Government has the duty to protect its Citizens from often times harming themselves and that corporations must act responsibly. To what extent do the American people need to be babied?
Kevin Pl (FIU)
ReplyDeleteMozilo made a smart move by settling because his punitive penalty surely would have been a lot more had it been left to a jury. But even still, considering how much he made by intentionally defrauding investors it should have been a lot higher. He knew what he was doing, and now, after contributing to our countries financial recession, justice will not serve him properly. The SEC has dropped the ball by settling this low.
LaureenG (FIU)
ReplyDeleteWow! 500 million over an 8 year period?
I know that the first instinct is to blame consumers; however, isn't home ownership one of those basic American dreams that shows you've made it when you've bought that house. Most people go into these loans thinking 1) the house will appreciate and 2) if I need to, I'll work overtime or get a second job.
The housing market was so strong for so long that the downtown was completely unexpected for most people.
It's true that homeowners should have been more conservative in their borrowing but it's more true that the banks should have been even more conservative in their lending practices.
Maybe if they didn't know to pay so much in executive pay, the pressure would not have been as great to make these risky loans.
Isn't hindsight wonderful?
Johanna D. (FIU)
ReplyDeleteFor Mozili to only have to pay $22.5 million when he made $500 million by knowingly defrauding investors and ruining a company is an insult to most Americans who are struggling to pay their mortgages or have lost their homes. If this case would have gone to trial, I am almost certain that a jury would have imposed a much harsher penalty on Mozili. I do agree that he is not the only person to blame, the banks and the SEC should share the blame as well. And, those who applied for these mortgages knowing they cold not afford them and they were living beyond their means. But, the banks should have also done more background checks on these applicants instead of giving away loans like candy.
Brian C. (FIU)
ReplyDeleteThere is no incentive to do what is write if the punishment isn't going to bother you. I agree with Johanna, a jury would have taken Mozili for all that he's worth (or at least a bigger chunk of it). Of course there is something to say about the loss he has suffered to his reputation and whether that should be taken into account, but even taking that into consideration the payment is still absurd.
The only reasoning I can see behind the low payout is that it wasn't ALL his/ Countrywide's fault. There were a lot of players in this game and putting the whole of the blame on one person is not right, however disgraceful that one person is.
This is a classic example of high paid executives taking high risks without regards to consequences and later begging for forgiveness citing ignorance and incompetence. As long as this continues and there are no stiff penalties, white collar criminals will continue to engage in risky behavior as there is no real punishment. Mr. Mozillo enrich himself on the back of the american citizen allowing subprime loans be given to unworthy and unqualified applicants. Mr. Mozillo was the top leader and as such he should be held to a higher standard and not be given a free pass. He had the power to make changes and chose to continue the status quo. The entire US economy is paying the price given the unprecedented number of foreclosures and bankruptcies. He walks away with millions while other lose their home and are unemployed.
ReplyDeleteJULIE ST (FIU) I agree with Saulo P., and while Mozilo should be punished for the crimes he committed, we also have to take some of the blame. Many Americans live beyond their means, and are willing to "buy" a house that costs $800,000 with zero down, when realistically, they can only afford a $200,000. So yes, the banks may have taken advantage of people who live beyond their means, but taking advantage of people does not always equal a criminal offense. People need to read the fine print and realize what they are getting into before they sign on the dotted line. If it seems to good to be true, it usually is.
ReplyDelete