Countrywide and Bank of America

This is part four of this series but I got tired of calling it "Depressing News," although it still is. In the latest news flash, Bank of America has told David Sambol, currently President of Countrywide, that his services will not be required as, if, and when the proposed merger takes place.  It would appear, however, that he will get the previously promised $28 million in compensation.

In a very kindly worded announcement, BofA said that they wanted the combined mortgage operation run by someone with a "deep understanding of the Bank of America culture and operating model."  Thus it would appear that BofA is buying the chicken coop without the top foxes and that the proposed merger is more likely to occur.

What is to be learned here?  The thing that I see is how blinded those who are benefitting from a structure can be to changes that can and will affect them. Whether it is President Mugabe of Zimbabwe or Angelo Mozilo of Countrywide or an almost successful Presidential candidate, they are part of a culture in which they tell themselves they are so successful that they can’t lose. 

There is a fundamental part of human nature that seems to affect all of us.  The quick demise of Countrywide from high-flyer last year to almost bankrupt company being picked up for ten cents on the dollar was appalling only because of its speed. Had you asked Countrywide’s highest executives about their prospects a year ago, they would have told you that they were bulletproof.

I want to make the distinction between types of seemingly random events. The type of disaster that hit Parkersburg, Iowa last week was random. You do not know where a tornado will happen, although it is more likely in Iowa than in, say, New York. But if you look at the Parkersburg website at http://www.parkersburgiowa.info/ I defy you to find any consciousness that some 40% of the town would soon be leveled. 

The Countrywide event is different. It is the result of a grave miscalculation of the risks involved in profligate lending. You wonder what Mr. Mozilo’s approach to underwriting would have been had all losses been deducted from the $474 million in stock that he cashed in. It’s easy to play risky games if you are playing with OPM, Other Peoples’ Money.

What is less understandable it that there was plenty of evidence that strongly suggested that the foreclosure rate was going to be high with subprime loans, perhaps in the 20% range, as now appears to be the case. Notwithstanding the evidence that suggested Countrywide’s actions were incredibly risky, they went ahead and did them anyway.

Finally, speculation is that the Countrywide name will also vanish. That is not unusual. Remember that after the crisis of the ’80s and ’90s, many Savings & Loan Associations changed their names to Savings Banks, a name that appeared more appealing to consumers. But it does seem to be a sad end for one of America’s most recognized brand names, even if it is fitting.  The brand joins WorldCom, Bear Stearns, Enron, and a host of others on the scrap heap of American business names brought down by greed. 

Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.