It was obvious back in 2005, when Countrywide CEO Angelo Mozilo was still riding high, that the man had some deep psychological issues, and that they informed his approach to banking.
We previously spotlighted a NYT profile from then, which was all about the big fat chip on Mozilo’s shoulder, and his disdain for establishment bankers that did things the old way. He didn’t like, for example, how they did elitist, ivy-league stuff like denying loans to the proletariat.
Ah, if only he’d been a little more establishment…
But it turns out Mozilo was probably even more messed up than we thought. In a fresh New Yorker profile on Mozilo, Connie Bruck (not surprisingly) connects his anti-establishment attitude to his permanently looking like a tangerine:
“The new company [Countrywide] sent Mozilo first to Virginia Beach and then to Orlando. He had never lived outside the Bronx, and years later he told friends that it had been difficult to be a darkskinned Italian-American in these communities. In Virginia Beach, the local club where businesspeople congregated refused to admit him, and in Orlando he had trouble selling mortgages until he met a group of Jewish homebuilders who couldn’t get financing. As his sister, Lori, told me, “Angelo said, ‘Nobody wants to work with you. Nobody wants to work with me. Let’s do it together.’
He was always this Italian guy people didn’t want to accept.” She went on, “When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus.”
After Countrywide was dinged in 1992 for having a mediocre track record of lending to minorities, Mozilo started a manic drive to completely eliminate the homeownership gap.
Countrywide opened new offices in inner-city areas, created counselling centres, and loosened some lending standards, to include borrowers with less than pristine credit histories. Between 1993 and 1994, the company’s loans to African-American borrowers rose three hundred and 20-five per cent, and to Hispanics they increased a hundred and 60-three per cent. In 1994, Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development.
“Countrywide went from close to the bottom in lending to minorities to near the top,” Gnaizda said. “I remember Mozilo telling me, ‘I don’t want to narrow the gap in lending to minorities, I want to end it.’ “
Eventually, subprime loans became too attractive a business for Countrywide to resist. In September, 1996, it created a new subsidiary for these loans, called Full Spectrum Lending; if the loans performed poorly, the Countrywide brand would not be tarnished. “It was a careful entry, considered closely by those at the top of the company,” a former high-level Countrywide executive recalled. “We sat together and asked each other, ‘Would you make this loan with your money?’ “
To offset the credit risk posed by subprime lending, the company required borrowers to make a substantial equity investment, ranging from fifteen to 30-five per cent. . .”
Now, Barry Ritholtz, who originally plucked out both of the above chunks from the article concludes that this all shows: “It was the Private sector that saw a profit opportunity and went for it. They made the loans. The government’s role was to provide rhetoric“
What doesn’t make sense, here, is this desire to make it so black-and-white, to say it’s just the private sector, and that the public sector had no role.
Hello, Countrywide was funded by Fannie Mae (FNM) and Freddie Mac (FRE). In that 2005 NYT profile, he lashed out at efforts to reform the GSEs, since without their funding, there would be no way for him to compete with more conservative rivals like Wells Fargo WWFC).
We asked Barry about this, and his response was that Fannie and Freddie were odd, private enterprises, not entitled to the full faith and credit of the United States, but that by being connected, they did end up with a full bailout.
But we disagree. For one thing, they were established by the government. Second, there was an ongoing discussion about what kind of backstop they had from the government, and obviously many people assumed that the implicit guarantee would be explicit in a crisis, which explains their ability to gain cheap financing.
It just doesn’t fly to say that Fannie Mae and Freddie Mac were private sector manifestations, and since you can’t have Mozilo without them, there’s no good reason to make such a black-and-white distinction of what’s the government’s fault and what’s the private sector’s fault. There’s plenty of blame to go all around.
That being said, there’s no doubt private sector greed played a huge role in this mess. But greed is a constant. People didn’t just decide to one day get more greedy. And greed (even excessive greed) is dandy, if the ultimate blowup only hurts the greedy person.
What really makes financial sector greed so odious (as opposed to the greed of, say, your local auto mechanic) is the ability to loot the taxpayer. And Fannie and Freddie were the ultimate taxpayer looting vehicles.
Just think about all the avenues:
- Investors in their debt were able to get juiced yields, even though the government would bail them out.
- Countless politicians, cronies and hacks made millions working for them, in stupid patronage jobs.
- Common shareholders profited for years, even though the GSEs were supposed to be serving a public mission
- Dastardly lenders like Countrywide and Lehman were able to flourish, flushing their crap assets onto the public ledger via these institutions.
These were gigantic, taxpayer-looting machines, and they’ve been bailed out to the tune of $400 billion (potentially). If you insist that they were purely private institutions, then that does get the government off the hook to some extent. But otherwise, it’s impossible to divorce the greed of the private sector from the enablers on the public side.
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