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From Bloomberg :

June 5 (Bloomberg) -- The day after Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo arranged to start $139 million in stock sales, he told two top deputies there was “no way” to value one of its most popular mortgages.

“We are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales,” he wrote in a 2006 e-mail released yesterday by the Securities and Exchange Commission. “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet.”

[Actually, I sort have an idea of how those loans will behave. See the content from a previous post:

Analysts at Moody's Investors Service warned Tuesday that U.S. banks with debt that is rated by the Moody's Corp. unit face about $470 billion in losses through next year. If the economy continues to suffer, those losses could swell to $640 billion, and Moody's would likely accelerate its bank-debt downgrades.

"In such a scenario, absent continuation, and likely deepening, of U.S. government capital and liquidity support programs for the banking industry, numerous banks would be insolvent," the Moody's analysts wrote. [We all know where you have heard that before. Review the data in my recent posts if you doubt this:

  1.'s Realistic Recast of SCAP's Realistic Recast of SCAP 2009-05-12 14:52:09
  2. My comments on the NYC condo market which seems to have wrinkled a few overly-sensitive feathers. Be sure to read through the comment section.
  3. Then be sure to read The Truth About the Banks Has Been Released: the open source spreadhseet edition and The Re-Release of the Open Source Mortgage Default Model. 
  4. After that, if you're bored, there is always the T2 Partners analysis or even the NY Times' perspective.]

The funny thing is, the industry is still flying blind, still cannot value the mortgages, and the only thing that they really do know is that they are value vacuums. Thus, the healthier banks ate the sick banks with government


medicinal monies. The healthier banks hence became sicker banks, but want to give the government medicine back because they don't like the after-taste. The now sick banks have all of this stuff on their books that killed off the original sick banks as property values continue to plummet and unemployment continues to rise at quite a healthy pace. Notice, there are no bank executives buying stock now! Just investors that see green shoots in the yards of foreclosed and REO houses.]

Mozilo, 70, co-founded Countrywide in 1969 and built it into the nation’s biggest home lender. Yesterday he became the most prominent executive targeted by the SEC in a regulatory autopsy of the subprime crisis. He, and the two deputies who received his e-mails on so-called pay-option ARM loans, were accused of hiding deteriorating lending standards before the housing bubble burst. The agency quoted Mozilo’s messages, arguing he avoided losses by making illegal insider trades.


Not ‘The Whole Story’

“The complaint does not tell the whole story of either internal communications or the public disclosures,” said Mozilo’s lawyer, David Siegel, at Irell & Manella LLP in Los Angeles, in a statement. “The mix and risks of Countrywide’s loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace.”

[How could they be well disclosed and understood by the marketplace if they weren't even understood by the vendor's CEO, CFO and COO? That's going to be a hard sell to a jury! ]

The agency is pursuing the lender’s executives because of its “well-publicized enforcement failures” in other cases, said Walter Brown, Sambol’s attorney. “Making groundless allegations and losing in court will not help the SEC restore its reputation,” Brown said. [Failure is right! I don't see why they don't go after the Bear Stearns CEO who says that his company had ample liquidity 48 hours before failure, Lehman's top brass who called Einhorn a liar after being busted hiding the sausage, GGP who actually tried to insult me! I can go on with this list... WaMu, Freddie, Fannie, and IndyMac, GE, the Treasury Secretary under the Bush Administration! Where would we stop! How about the rating companies???]

Countrywide made detailed credit-risk disclosures, he said, and investors and rating companies knew that the company had “liberalized” its lending practices, as had almost all other lenders at the time. Sambol disclosed details about subprime products, the risks they carried and other information that the SEC now says was absent from filings, Brown said.


Sieracki bought Countrywide stock during the period the SEC claims he believed the company was withholding information from the market, said his lawyer, Shirli Weiss. He said Sieracki didn’t violate securities law and called the lawsuit “completely without merit.”

Countrywide helped trigger the subprime bubble by offering loans to people with below-average credit scores. From 2005 through 2007, the lender expanded its underwriting guidelines and wrote increasingly risky loans, while reassuring investors it focused mainly on so-called prime quality mortgages, the SEC said. Mounting defaults ultimately slashed its stock price, prompting its sale to Bank of America Corp. last year.

“It’s the first case of true notoriety” to target fraudulent practices in mortgage lending, said Jacob Frenkel, a former SEC lawyer now at Shulman Rogers Gandal Pordy & Ecker PA in Rockville, Maryland. “It clearly signals the opening of the spigot to both civil and the criminal cases.” [Oh, it certainly does. There is not one major bank not guilty of what Countrywide's C-suite is being charged with. I find it absolutely amazing that with all the risk rampant withing these companies, people are foolish enough to buy the stock now.]


 Worried about the so-called pay-option ARMs, which offered low introductory monthly payments that could later balloon, Mozilo urged Sambol to sell the portfolio, saying the company was “flying blind” on how the loans would perform in a sagging economy.


While Mozilo acknowledged in e-mails the risks associated with Countrywide’s loans and the company’s need to sell the option-ARM portfolio, he was simultaneously arranging to dump his own holdings, according to the SEC’s complaint.

In the final months of 2006 he began establishing four sale plans “while in possession of material, non-public information concerning Countrywide’s increasing credit risk,” the SEC said. From those plans, he exercised over 5.1 million stock options and sold the underlying shares for total proceeds of almost $139 million.

The SEC authorized such plans in 2000 to let executives sell shares without the appearance of tapping current information on their companies. Still, the SEC may make its case against Mozilo, if it can show he had significant information that the market lacked when he arranged his sales, said Robert Hillman, a securities law professor at the University of California, Davis.

“These plans are not a get-out-of-jail card,” he said.