NY Times: Inside the lending spree at Countrywide Financial

It's a bit of a long article, but the New York Times tells us how it went down in Countrywide Financial, one of the poster children for the subprime fiasco. I'm not going to put the whole article up here, but you can read the whole thing if interested. If you are, skip the spoilers below.

This is basically a tale of greed - is anyone surprised? Countrywide gave their salespeople financial incentives to steer consumers to loans that were the most profitable for Countrywide. It goes without saying that consumers didn't always get the cheapest loans they would have qualified for.

Countrywide's computer systems excluded borrowers' cash reserves until last September (by which time Countrywide was already in financial distress). If it had not, some borrowers could have qualified for lower-cost loans than they received.

Meanwhile, Angelo Mozilo, Countrywide's preternaturally bronzed CEO, sold hundreds of millions of dollars worth of stock, including on the way down to nearly zero. He hasn't made a share purchase since 1987. In other words, he wasn't willing to put his money where his mouth was, in his own business. It's also regarded as bad form to sell when the stock is going down. Stocks can go down when a company is suffering through correctable problems and is investing in its future, so a good CEO should in fact be buying on the way down. Countrywide was also incredibly generous with stock option grants. Companies that are overly generous with options are basically giving shareholders' money away (although options are not bad per se, and are used well by companies like American Express and Microsoft).

And Countrywide continued to have lax lending standards even pretty late into the crisis.

I think I read a survey somewhere, showing that Americans were somewhat in favor of extending aid to at least some borrowers, but were dead against extending any aid to the lenders. I find that a reasonable proposition. The problem is it will be very, very difficult to do that.

As for Countrywide, it is to be acquired by Bank of America. Countrywide was the nation's biggest mortgage servicing platform, and allowing it do die completely would make it harder for people to get mortgages. I've heard bad things about Bank of America's customer service, but they will at least enact stricter lending standards, and they will have the financial resources to cut some borrowers a break so that they can repay their loans. They have no legal requirement to do so, although it would be in their financial interest as well as good PR.

As for Mozilo, it will be hard to prove criminal or civil wrongdoing. One Senator (a Democrat and a man, but I forget his name) asked Mozilo to give away most of his profits to charity. You think he will?

It is within the remit of the Federal Reserve to control lending standards. Alan Greenspan, because of his ideology, refused to even consider doing so. When he cut interest rates after the tech bubble burst, his ideology blinded him to the fact that he was igniting a preventable bubble in housing. Now, some say he should not have cut interest rates so deep; I don't believe I have the information to say that he should not have. However, he could and should have controlled lending standards, but he did not do so. He should share in the blame for this crisis, and I hope the present Chairman of the Federal Reserve, Ben Bernanke, will do better. Bernanke is a Republican, but he seems a smart man.