THE PENNY KING DECLARES “SEC SHOULD INVESTIGAGE MR. MOZILLO OF COUNTRYWIDE FINANCIAL, ONE OF THE BIG
Alex S. Gabor
August 22, 2007
There is a tremendous amount of new activity in the regulatory sector regarding projects to build data collection capability focused on issues like the mortgage market, collateralized debt obligations or CDOs, and counterparty risk.
Why? Mostly because regulators cannot figure out where the beginning and the end of the mess in the collapsed mortgage industry is let alone sift through the massive amounts of data coming into regulators about the fraud being massaged by institutional media manipulators in an attempt to quell the tide that has whipped across the planet.
While Reuters, the Wall Street Journal, CNBC and Yahoo are spinning stories about the possibility of Warren Buffet’s Berkshire Hathaway buying bits and pieces of CFC, a storm of controversy surrounding Countrywide and its Board of Directors is in the making.
Understanding who's got the ball in terms of concentrations of risk arising from the mortgage securitization sector has become a near obsession within certain US regulatory agencies -- and not a moment too soon. The market for mortgages around the globe secured by United States Real Estate has completely collapsed. Now the regulators are sifting through the worst American disaster since 911 and Hurricane Katrina combined.
The regulators and the entire Congress are at risk of being sued by the general population in America, but most particularly by a class of homeowners/debtors for having failed and allowed the massive fraud which has been unfolded by very powerful grassroots investigators.
One small group is looking to amass an army of lawyers to file a $50 trillion dollar suit naming the Department of Justice, thousands of negligent FBI agents, the Securities & Exchange Commission and their three thousand lawyers for the trillion dollar fraud, but not a single lawyer in the country can stand up for this without being blacklisted.
The darkest shadows currently hanging over the US mortgage industry are about liquidity, or the lack thereof, as a result of the corrupt accounting practices at such places as Fannie Mae, Freddie Mac, Washington Mutual, and Countrywide Financial” according to one investigator who says that “all four of these once stalwart pillars of phony money politics are being severely scrutinized newly after many years of government settlements by both Fannie and Freddie, new massive fraud allegations in the trillion dollar debacle have resurfaced.”
The market for new loan originations has shriveled to less than ten per cent of what it was three years ago. For the investor in collateralized debt obligations, (CDOs), the torrid flow of 2005 and 2006 is now less than a trickle.
Mozillo has falsely represented to the mainstream media that he understands the liquidity issue and is continuing to make those broad public statements after selling out many of his shares for cash before his companies very own liquidity crisis hit the mainstream press. Now bankers and their media manipulators are scrambling to ensure that Countrywide doesn’t become the next Enron or WorldCom”, says the Penny King.
He falsely claims credit for sounding the alarm regarding subprime and asset quality generally a year ago. However, research has proven that this false and misleading statement was designed to mask the true situation at Mozillo’s company, whose stock he has sold more than a quarter billion dollars worth of stockholder equity out of in the past year”, according to the Penny King.
Mr. Mozillo and his public relations engine are attempting to rewrite history and take credit despite having had to get instant bailout money in excess of ten billion recently.
His public relations team is hard at work trying to revive failing confidence in the company whose hemorrhaging is not yet quite plain and clear to the rest of the investing public in America and overseas.
While Mozillo very cleverly spins his yarn about being prudent and representing that he is anticipating the demise of his less prudent competitors, as well as speculative investors in real estate, this is only designed to mask the truth. Countrywide and its corporate leaders are not of sound mind and body.
They should be investigated and removed immediately”, said the Penny King, who continues to buy pennies on the streets of Los Angeles for a dollar each. His statements were made in an interview while he drove past Countrywide’s world wide headquarters in Calabasas in his shiny spray painted vehicle pictured above.
As $80 billion worth of liquidity was being pumped into the economy by the Fed and by the banks, Mozillo told Jim Cramer, another mouthpiece of the Wall Street Mortgage Banking Ponzi Scheme that there are "hundreds and hundreds" of subprime lenders being forced from business as the market rationalizes "below the radar screen."'
Are these going to be happy days for Mozillo? Not likely. Of the 50,000 mortgage brokers in Los Angeles County alone, more than half of them have already disappeared as asset prices continue to plummet.
The demise of these "irrational" lenders, as Mozillo rightly calls them, means a reduction in secondary market demand and the prospect of losses for investors in existing production. Mozillo fails to mention that his company underwrote many of the loans for those irrational lenders as a market participant in the global fraud.
How much more severe the downturn in loan production will be cannot yet be measured as a third of all outstanding mortgage debt in America reprices in 2008. If the Fed is forced to lower interest rates to less than 4% you might see a refinance boom, but again, the market has been so over inflated that it will be a long time before a majority of the people who thought they could afford them will really qualify again for houses in the million dollar price range without those liar loans.
He seems to be pointing the finger at the brokers when in fact CFC underwrote and sold hundreds of thousands of mortgages which contained false and misleading information and data which was then securitized into the international banking and investing markets.
Entire nations are now at risk of their economies collapsing because of this fraud.
Picking up market share by watching your competition destroy itself is not a business model for the faint of heart, but CFC has historically excelled avoiding the cyclical pitfalls of the mortgage market but if regulators do their jobs, Mozillo will not have a job much longer. Nor will the entire board of directors who right under their noses allowed Mr. Mozillo to make off with more than $250 million in stockholder equity.
One telltale indication that Mozillo indeed knew the US mortgage bubble was a bust is that CFC raised its loan yield 1.5% between 2005 and the end of 2006, this as his competitors were playing beggar thy neighbor, competing for the last marginal borrowers, all the while Mozillo was dumping his quarter billion in stock.
Mozillo will not have enough capital in CFC to ride the secular wave of rising mortgage defaults in the rest of 2007 and beyond unless he puts back the $250 million he took out over the past year. Mozillo, who is now bragging that he warned over a year ago had inside information and acted on it to the tune of $250 million in illegal profits, stated the Penny King”
Not everyone takes the sunny, pick the meat from their dead bones outlook of Mr. Mozillo on the US real estate sector.
Mozillo has no concern for the millions of homeowners, lenders, traders and end-investors who are now fully burdened by huge amounts of risk shifted onto their shoulders, let alone those who are going to lose their jobs, their homes, and be added to the growing 40 million homeless and poor people in America who have no clue what is really going on at the top of the financial pyramid scheme, said the Penny King”.
Nearly all involved share a common problem -- failing liquidity, falling prices in particular and widening credit spreads generally.
Here are some examples seen and heard from the travels of various industry investigators:
The Home Owners: You are a two-career, "prime" couple in Los Angeles working in the entertainment industry who sold their townhouse in 2003 for $370,000 and bootstrapped into a $750,000 home in the San Fernando Valley, via an interest only mortgage. The mortgage balloons in a year. The home valuation, in theory at least, peaked over $1 million early in 2006. Today, with interest rates rising and LA and San Diego quickly reverting back to a rental model for new construction, the two-career couple cannot find a bid for the house or a refinancing such that they could walk away at the close without writing a check. Their best offers are coming from short sale opportunity knockers who do not offer more than 65 cents on the dollar for anything currently listed on the market.
Countrywide’s share of the market in Los Angeles is well over 50% for this type of scenario, but if Mozillo can avoid a wide scale investigation of his operation by government officials he may be able to stem the tide and avoid another run on his bank. Unfortunately Mozillo took out his money before the rest of the public could.
The Money Manager: You are a mutual fund manager who purchased a number of CDOs over the past several years from Countrywide, including a series of deals brought in the 2005-2006 window when risk spreads were particularly tight and demand for collateral was fierce. Because of the high proportion of subprime paper in these deals, the effective bid for these specific CDOs has fallen dramatically as the ratings for the deals were downgraded. The fact that spreads have widened is also adding to the pain, which all told equates to roughly a 10% loss on the paper. Incidentally, the CDS for CDOs still trade significantly below the expected low double digit default rates on such portfolios.
Your auditor begins to ask questions when your prime broker balks at emailing a valuation for your portfolio. If you follow the paper and electronic trails required under federal law, you will find that generating illegal profits from the sale of fraudulent securities results in money laundering, even if you are a bank licensed to create money out of thin air.
The Institutional Lender: You are the Community Relations Officer for CFC which sold some of its mortgage production during 2005-2006, but still has more than 45% of total assets concentrated in retail and commercial real estate lending. The bank has made good money originating, selling and even trading loans, and writing credit derivative insurance on CDO traunches. In fact, since 2003 the bank's portfolio of real estate loans has doubled as a percent of total assets.
The bank's credit function has been satisfied with the risk profile, net long default risk and a hefty helping of duration as well, but the internal auditor just flagged the loans and CDS, and added an exception to a quarterly review, asking whether a valuation haircut need be applied to the bank's conduit and related derivatives. Fact is, the conduit is now effectively closed and the only bids in the market for loans purchased in the heady 2005-2006 window are well below par.
The Trader: You're a trader at a hedge fund which supplemented its returns over the past several years by writing CDS cover for CDOs brought to market by your prime clearing broker. The hedge fund's inventory of CDS contracts is financed by the prime broker. So far, the hedge fund has experienced no defaults covered by its CDS positions and took previous period premiums to income rather than creating a reserve for future contingencies.
The indicated bid side of the five year CDS written by the fund against CDO deals has moved almost 10% in the past 90 days and the prime broker is not willing to make a cash bid for older CDS positions. Given the change in pricing, the hedge fund's managers debate when and how to inform investors about the loss and, more important, the prospective future cost of performing on CDS obligations.
The fund eventually suspends client withdrawals and reserves 30% of fund assets to cover CDS obligations. Meanwhile you watch and learn as six more hedge funds from offshore exotic places are advising their institutional clients that they cannot make any more redemptions and another $250 billion in global liquidity disappears over night.
All of these situations have one thing in common; reliance upon quantitative models employed by broker-dealers and the rating agencies to measure and price the risk of loans, CDOs and derivative securities which were based on false and misleading information contained in the loan applications backing over a trillion dollars worth of securities.
The pressures from both buyers and sellers of mortgage securitization deals helped boost collateral values and push credit spreads down to unrealistic levels, in the process causing a demand-driven surge in home prices which saw default rates fall to zero at many banks.
At one point last year, CDS for subprime CDO deals was trading at less than 10% of the expected default rate on the collateral, like a "CCC" rated bond trading as an "A" credit default rating. Now the expected default rate on subprime CDO deals is more like 90%, worse than junk bond status.
Now that the process that created the mess in the first place has been unraveling for months while the mainstream media gets trickles of truth about the reality and severity of the coming depression, competitive souls like CFC CEO Angelo Mozillo, think that fact seemingly spells opportunity, but only if loan default rates across the boards stays below long-term averages, and he stays out of the government’s crosshairs.
Editorial Comment: “The Penny King” is the title of a documentary comedic drama being filmed on the streets of Los Angeles. The character “The Penny King” is also a figment of the imagination, but pennies have real appreciating value for many more reasons than the fact that some man acting in street theatre is buying them for dollars each every Sunday off the Boardwalk in Venice Beach, California. All actors who participate in the docucomedic drama get paid the same. A dollar for each penny they bring to the table according to the ability of the producers to pay on any given day.
Photo Courtesy Alex S. Gabor Syndicate. All Rights Reserved!