Is Angelo Mozilo the Bernie Ebbers of the 2008 credit crisis? Mr Mozilo, the former chairman and chief executive of Countrywide, faces civil fraud charges and not criminal ones of the kind that led to Mr Ebbers, the former chief executive of WorldCom, being sentenced to 25 years in prison in 2005.
But the civil suit brought against Mr Mozilo by the Securities and Exchange Commission is a vivid portrait of alleged wrongdoing in Countrywide and of executives who are accused of knowing their lending practices at the height of the housing bubble were unsound.
It paints a picture of Mr Mozilo oddly reminiscent of Mr Ebbers’ defence at his trial – that, while he was the titular head of the corporation, others really ran the place.
The New York Times reported during Mr Ebbers’ trial that:
The defense has argued that Mr Ebbers, a former Mississippi gym teacher, milkman and bouncer, used guile and bravado to build a tiny reseller of long-distance phone service into a global telecommunications giant. But they say that he restricted his duties to motivating his sales force and cutting costs. It was the sophisticated deputies he brought aboard through more than three dozen mergers who were in charge of the company’s complex technology and accounting activities, the lawyers say.
In Mr Mozilo’s case, the SEC alleges that, although he became worried by some of Countrywide’s sub-prime lending practices, and even told subordinates to sell riskier parts of its portfolio, he was not heeded by executives below him, notably David Sambol, the former chief operating officer.
Instead of insisting that his instructions were followed, the SEC claims that Mr Mozilo tolerated this lack of action, and carried on defending in public the practices that he criticised internally:
In one internal email, Mozilo referred to a particularly profitable subprime product as “toxic” and in another he stated that the company was “flying blind” and had “no way” to predict the performance of its heralded product, the Pay-Option ARM loan. Mozilo believed that the risk was so high and that the secondary market had so mispriced Pay-Option ARM loans that he repeatedly urged that Countrywide sell its entire portfolio of these loans.
In Mr Ebbers’ case, the jury rejected his defence. In Mr Mozilo’s case, the SEC’s claim that he appeared to know something was wrong yet did not stop it occurring is part of the SEC’s case.
The sentence that most struck me in the SEC’s suit comes right at the end: “Plaintiff hereby demands trial by jury”. The SEC clearly thinks a California jury is not going to be particularly sympathetic, and I have a feeling that it is correct.
