Making Money From the Messes They Made, When They Should be on the Way to Jail

This has to stop, folks.

Apparently, a couple of former executives at Countrywide have gone into business for themselves. Now, for those of you who have really short memories, Countrywide was pretty much at the epicenter of the mortgage meltdown, and had to go out of business because of the billions and billions of dollars in bad loans they made with their customers' money. In other words, they were irresponsible with others' money.

Can you guess what they're doing now?

This is from today's

Whether they deserve to be or not, Countrywide Financial
and its top executives would be on most lists of those who share blame
for the nation’s economic crisis. After all, the banking behemoth made
risky loans to tens of thousands of Americans, helping set off a chain
of events that has the economy staggering.

So it may come as a surprise that a dozen top Countrywide executives now stand to make millions from the home mortgage mess.

Stanford L. Kurland, Countrywide’s former president, and his team of
former company executives have been buying up delinquent home mortgages
that the government took over from other failed banks, sometimes for
pennies on the dollar. They get a piece of what they can collect.


PennyMac was born last spring after Mr. Kurland received a phone call from a childhood friend, Lawrence Fink, now the chief executive of BlackRock, which along with other investment groups is trying to figure out how to profit from the decline by buying up distressed loans at fire-sale prices. Mr. Fink lured him back in business, and BlackRock invested.

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from Highfields Capital, a hedge fund based in Boston. Other investors include Atlantic Philanthropies, based in Bermuda and created by the billionaire former owner DFS Group, a chain of airport duty free shops.
PennyMac makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously, even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million, or the equivalent of 38 cents on the dollar, for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect from borrowers, with the federal government receiving the rest. Eventually that will rise to 40 cents.

Telephone operators at PennyMac’s offices — working in shifts —
spend 15 hours a day trying to reach borrowers whose loans the company
now controls. In many cases, they offer drastic cuts in the interest
rate or other deals, which PennyMac can afford, given that it paid so
little for the loans.

PennyMac hopes to achieve a profit of at least 20 percent annually,
and it is actively courting other investors in an effort to build its
portfolio, which now consists of $800 million in loans, to as much as
$15 billion in the next 18 months, executives said. For the borrowers
whose loans have ended up with PennyMac, it can translate into an
extraordinary deal.

You know what? There was a time when financial people who were irresponsible with other people's money were shunned by society, or forced to pay restitution and banned from the industry, or even thrown in jail, if the negligence was bad enough.

I mean, under Kurland's leadership, Countrywide's loan portfolio went from $62 billion to $463 billion, and apparently most of these were shitty loans, because the company went belly up. So, he oversees the company's acquisition of hundreds of billions of dollars in shitty loans — and remember, this is other people's money, not his — and now, he's allowed to make money from the very same scheme he participated and caused when he was with Countrywide?

Check this out, from the same article:

In retrospect, Mr. Kurland said, he regrets what happened at
Countrywide and in the mortgage industry nationwide, but does not
believe he deserves blame.

“It is horrible what transpired in the industry,” said Mr. Kurland, who has never been subject to any regulatory actions.

But lawsuits against Countrywide raise questions about Mr. Kurland’s
portrayal of his role. They accuse him of being at the center of a
culture shift at Countrywide that started in 2003, as the company
popularized a type of loan that often came with low “teaser” interest
rates and that, for some, became unaffordable when the low rate

The lawsuits, including one filed by New York State’s Comptroller,
say Mr. Kurland was well aware of the risks, and even misled
Countrywide’s investors about the precariousness of the company’s
portfolio, which grew to $463 billion in loans, from $62 billion,
during the final six years of his tenure.

“Kurland is seeking to capitalize on a situation that was a product
of his own creation,” said Blair A. Nicholas, a lawyer representing
retired Arkansas teachers who are also suing Mr. Kurland and other
former Countrywide executives. “It is tragic and ironic. But then
again, greed is a growth industry.”
In other words, he was an executive with a company that had so many bad loans in its portfolio that it sank under the weight, but he's not responsible in any way for any of it? How is that possible?

The simple answer is, it's not. The executives of a financial institution have a fiduciary duty to take "reasonable care" of the money people entrust to it, whether they are stockholders or depositors. That doesn't mean there's no risk, but let's be real here. Countrywide had been around since 1969, and at about the time Kurland joined the company in 2003, its stock was one of the most successful investments in the pantheon, having ourperformed Wal-Mart, WaMu and even Berkshire Hathaway. From 2003 until its purchase and demise in late 2008, Kurland led the company to oblivion.

There has to be a price to pay for that; it sure doesn't seem right that he and his partner are able to profit from the spoils of his previous excesses. If there is no more natural shame in American business, there should at least be enforced shame. It's time to get people like this out of the business, and quite possibly in a jail cell. One can only hope that these lawsuits are successful, but I doubt it; it's likely the stockholders of Bank of America, who bought Countrywide's assets, will end up paying for Kurland's irresponsible leadership.


Making Money From the Messes They Made, When They Should be on the Way to Jail — 2 Comments

  1. You know, for a guy who is suggesting I cite my facts, thus implying that I’m not being truthful, you’re sure playing fast and loose here…
    Emanuel was on the Board for a little over a year, during which time they misreported earnings, and OFHEO smacked them for it in 2003. They did it the year Emanuel got there, and again for two years after he left. It was actually quite common for corporations at the time. Fannie Mae was accused of the same thing, and Congress was forced to pass Sarbanes-Oxley to fix it.
    By the way, Emanuel wasn’t even named in the complaint. Even though OFHEO was headed by Bush, and even though he was a Democrat in a Congress dominated by Republicans. Which makes your accusation empty.
    By the way, it was NOT the reason Freddie Mac got into financial trouble last year. Nice try.

  2. “You know what? There was a time when financial people who were irresponsible with other people’s money were shunned by society, or forced to pay restitution and banned from the industry, or even thrown in jail, if the negligence was bad enough.”
    In 2000, Bill Clinton added one of his friends to the board of Freddie Mac… that board that ended up being the downfall of that financial organization. Do you know who that was?
    Rahm Emmanuel.
    So yeah… I agree with you.