All The Devils Are Here: Unmasking the Men Who Bankrupted the World (28 page)

After posting his confession, Warren tried to flee the country but was arrested at the Canadian border with $1 million in Swiss bank certificates and $70,000 stuffed in his cowboy boots. The case was pending as of fall 2010. (ACC says that Warren was terminated for “egregious acts” and that it has found no research to support his hacking claims. The company also says it is “patently unfair” to use Warren as an example of a typical employee.)

Had Ameriquest been an outlier, that would have been bad enough. But it wasn’t. Its aggressive practices were copied by subprime competitors across the country—because they felt if they didn’t copy Ameriquest, they’d lose the business to someone who had. “I think Ameriquest was the trendsetter,” says Bomchill. “They spewed their slime everywhere.”

“Ameriquest was a problem for us because they were a large company and everyone was trying to compete with them,” says an executive at another large lender. “If we denied a loan, we’d track who ultimately did the loan and a lot of times it was Ameriquest. Every time we rejected a loan, the sales force would call up and say, ‘Well, Ameriquest is doing this.’ I would say, ‘Just because Johnny jumped off a bridge doesn’t mean you have to follow.’ ”

But they all did jump off the bridge. Including—eventually—the biggest lender of them all: Countrywide.

A
ngelo Mozilo had long had a conflicted attitude toward subprime lending. On the one hand, he looked down his nose at the likes of Ameriquest and Roland Arnall, and didn’t want Countrywide, or himself, to be viewed in the same light. “There is a very, very good, solid subprime business and there is this frothy business,” he once told investors. “[It] is very important that you understand the disciplines … that Countrywide has.” On the other hand, Mozilo couldn’t bear to see Countrywide’s market share eclipsed by the subprime companies. And market share remained his obsession. By the middle of 2003, he was promising investors that Countrywide “would get our overall market share to the ultimate 30 percent by 2006, 2007.” At the time, its share of the mortgage market was a little over 10 percent.

Mozilo would later frame the choices Countrywide faced in stark terms. “Ameriquest changed the game,” he said to a friend. “If you had said, ‘Nope, I’m not going to do this because it’s not prudent,’ you would have had to tell shareholders, ‘I’m shutting down the company.’ ” The reality, however, was never that simple. Mozilo had created a company that had the desire to be not just big and good but biggest and best embedded in its DNA. Taking a pass of a large segment of the business wasn’t Countrywide’s style. And then, as subprime two gained steam, Countrywide was increasingly riven by internal divisions. The way those conflicts played out may have helped influence Countrywide’s future course every bit as much as Ameriquest’s unquenchable thirst for subprime lending.

By the early 2000s, Angelo Mozilo wasn’t remotely the hands-on manager his frequent CNBC appearances would suggest. This wasn’t by choice; he was struggling with a variety of health issues. He had spinal cord problems
so serious he had trouble walking at times, according to one person who knows him well. He had neck surgery, back surgery, and another elective surgery, which went badly, this same person says. An old acquaintance who hadn’t seen him for several years was shocked when he next saw Mozilo. “He looked like an old man,” he says.

David Loeb, Countrywide’s other founder, wasn’t around, either, having retired as president and chairman in early 2000. (He died of neuropathy in 2003.) Loeb was in some ways the invisible founder, yet he had played a critical role in Countrywide’s success. Access to capital, the sale of loans in the secondary market, the management of interest and credit risk—these were the important but low-profile aspects of the business Loeb focused on.

Loeb’s departure hadn’t been entirely graceful. As he got older, his behavior became more erratic. In July 1999, for instance, the news broke that Loeb had sold a million shares of his Countrywide stock. High-ranking executives at publicly owned companies are never supposed to sell stock without first clearing the sale with the legal department and informing the rest of the management team and the board. Loeb had done neither. When one executive called to ask him why he had sold the stock without telling anybody, Loeb just chuckled.

After Loeb left, Mozilo seriously entertained the idea of selling Countrywide. There were lots of potential suitors knocking on his door, and he hired Goldman Sachs to find the best fit. Although Countrywide came close to selling to a big British bank—and to Washington Mutual—both deals fell apart.

Even without a sale, there were plenty of executives internally with the ambition and skill to run the company. Countrywide’s core group of executives had joined when the company was young and small. Like Mozilo, most of them lacked an Ivy League pedigree but made up for it with a combination of business savvy and fanatical work habits. Most of them had that same chip on their shoulder toward the financial establishment that Mozilo had. That attitude was ingrained in the culture of the company and was a big part of the reason why Countrywide was always striving to outdo the big boys—even after it had become one of the big boys. For Countrywide’s top executives, that deep-seated need to prove themselves never completely went away.

Chief among these executives was Stanford Kurland, a graduate of California State University Northridge, who was hired by Countrywide in 1979 after spending the early part of his career as Countrywide’s auditor. Kurland had an intense, bookish demeanor and a slow, almost hesitant way
of speaking that served to mask his deep emotion and strong will. In 1995, he became the chief operating officer of Countrywide Home Loans, the prime mortgage division that had always accounted for the bulk of Countrywide’s business; four years later, Kurland became the division’s CEO and joined Countrywide’s board. In 2004, he became president and chief operating officer of the parent company. To the employees, he was as much the boss as Mozilo. “It was always ‘Angelo and Stan want to do this,’ ” recalls a former executive.

Kurland was the one who took on the tasks that Loeb had always handled, making sure that Countrywide’s increasingly intricate plumbing worked perfectly. This was no small task at a company that was funding tens of billions of dollars’ worth of loans every month. “He was the inside guy, the numbers guy, the operations guy,” says a former analyst. In 2000, Paine Webber analyst Gary Gordon wrote a report celebrating Countrywide’s “wonderful discipline.” That discipline was very much Kurland’s doing, and he took great pride in it. He’d later tell people that while he was there, “there was never a single issue.” He was right. Other mortgage originators occasionally had trouble with funding or the sale of their loans. Countrywide never did.

Kurland also pushed Countrywide to diversify. He wanted Countrywide to be one of the most admired financial services providers in the country, not just a big mortgage maker. To that end, Countrywide bought a bank in 2000. Because the bank was regulated by the Office of the Comptroller of the Currency, Countrywide itself became a bank holding company, which was supervised by the Federal Reserve. Kurland used to tell people that being under the supervision of the country’s two most important bank regulators gave Countrywide extra credibility.

The purchase of the bank also forced Mozilo to leave the board of another bank, a subprime lender called IndyMac, based in Pasadena. IndyMac, which would be taken over by the FDIC during the financial crisis, had begun life as Countrywide Mortgage Investments. Founded by Mozilo and Loeb, it was a real estate investment trust, or REIT, that served as an outlet for Countrywide’s so-called jumbo loans, the ones that were too big for the GSEs to buy. (REITs pay out most of their profits as dividends to their shareholders.) Starting in the early 1990s, it began to aggregate loans from other lenders and turn them into mortgage-backed securities. It also began to originate its own Alt-A mortgages. In other words, the company was starting to compete with Countrywide. Despite the growing conflict, Mozilo stayed on the board (as did Loeb), exercised stock options, and collected some of the company’s
rich dividends. His son Mark began working there in 1996. And when Mozilo finally left the board after Countrywide bought a bank, it was because he had no choice. IndyMac also owned a bank, and bank regulations don’t allow anyone to serve as a director on two bank holding company boards. When Mozilo stepped down from the board, IndyMac forgave an outstanding $3.3 million loan and paid him another $3.6 million to cover any taxes he might owe on his stock options.

Taking the money was an outrageous move—and to some at Countrywide, a sign that money was starting to matter too much to Mozilo. In 2000, he owned 2.8 million shares of Countrywide stock (including options) and would take home $6.6 million in compensation—a number that would rise to $10.1 million by 2001 and $23.6 million by 2003. Yet he wanted more. “There are CEOs of companies to whom the most important thing is if they made more than the next guy,” says someone who knew him well. “Mozilo was getting caught up in all of that.”

If Stan Kurland was in charge of Countrywide’s plumbing, a very different kind of executive was in charge of producing all of its loans. His name was David Sambol; he had joined Countrywide in 1985 and become its head of loan production in 2000. (He was named chief operating officer for the home loan division in 2004.) Like Kurland, Sambol had gone to California State University Northridge and had worked briefly as an accountant. For many years, the two men appeared to be friendly. They were both highly intelligent, proud men who cared deeply about Countrywide’s standing and its market share goals. About Sambol, a former executive says, “he bled Countrywide.” But there the similarities ended.

Sambol was a super-aggressive salesman, very much in the Mozilo mode, though he lacked Mozilo’s charm and warmth. He did not always make a good first impression. “His style was one of attack,” says a former executive. “He would attack everything around him that didn’t report to him. He would be relentless, and very convincing until you challenged him with facts. But when you called him out, it never bothered him. It rolled right off his back and he was on to the next thing.” This aspect of Sambol’s character gave rise to an internal nickname: Teflon Dave. Another former executive who was a fan of Sambol’s says, “He loved the details, he loved knowing the details, and he loved putting people through the wringer to see if they knew the details.” People also made fun of his dictatorial nature. Other executives would pretend they were Sambol and say to each other, “You don’t
understand. You’re not capable of understanding. I see all of the colors of the rainbow.”

Inside Countrywide, it was very apparent that Sambol was “all about building his own kingdom,” as a former executive puts it. He was dismissive of everything that he hadn’t personally created. And while one former executive says that Sambol did care about risk, above all, Sambol wanted to win.“There was a clear mentality from his organization that these [subprime] guys are outcompeting us, we’ve got to do this, we just lost another loan,” recalls a former executive. Soon after taking charge of the sales force, Sambol made several changes aimed at putting Countrywide on a more even footing with its subprime competitors. The most important of these was to the compensation system: instead of taking home a flat salary, loan officers would earn commissions based on volume, according to the
American Banker
.

There was always friction at Countrywide between those who worried about risk and controls and those who wanted to sell more loans. But for a long time, the friction was manageable, maybe even healthy. “Really great organizations have friction,” says another former executive. “But friction can become cancerous.”

For Countrywide, the friction started to become a sickness in 2004, when the Federal Reserve began to raise interest rates. Normally, rate increases signal that it’s time for mortgage originators to pull back on loan production. But in this new world, loan production did not decline. Those, like Kurland, who worried that higher rates brought increased risks of default felt as though they were trying to hold back a flood. In lighter moments, they began to joke that they were becoming the CNOs—the chief nuisance officers. Kurland complained to confidants that on some days he felt his role was increasingly being relegated to that of the “no” guy. “The people who are propelled upward in many cases in corporate America are the guys who said yes to an idea that worked,” he later told a friend. “The guys who said no to a big failure—there’s no list for that. That’s why we end up with bubbles.”

When Countrywide had first moved into subprime lending back in the late 1990s, Kurland and Mozilo had both believed that the market was moving toward risk-based pricing, and the lines between prime and subprime were going to go away. And they convinced themselves that Countrywide would establish standards that would keep the truly troubled borrowers away, while capturing the more creditworthy subprime borrowers, those who were just a step below prime. Initially, the company was very careful.

Kurland issued three rules for subprime lending at Countrywide, according to several former executives. First, all of its subprime loans had to be sold, by which he meant the entire thing, including the residuals that most subprime companies held on their books. Second, the borrowers had to either make a 20 percent down payment or get mortgage insurance to cover the first 20 percent of the loan. Finally, Countrywide couldn’t offer any subprime loan products that had a higher probability of default than an FHA or VA loan.

These rules, however, seemed to constrain the company less and less as time went on—and whatever reservations Mozilo had about subprime lending seemed to fade the bigger the market got. Within a few years of making subprime loans, Countrywide could offer an astonishing 180 different products. In 2004, the
American Banker
accused Mozilo of sounding like a “carnival barker” as he listed some of them: “We have ARMs, one-year ARMs, three-year, five-year, seven- and ten-year. We have interest-only loans, pay option loans, zero-down programs, low or no-doc programs, fast and easy programs, and subprime loans.” Sambol told investors that “it’s our intent to carry every product or program for which there is reasonable demand…. [I]f your customer can legitimately qualify for a loan anywhere else in the U.S., they’ll qualify at Countrywide.” In a complaint the SEC later filed against Mozilo, Sambol, and former CFO Eric Sieracki, the agency alleged that Countrywide referred to this as its “matching” strategy: if a competitor offered a loan product, Countrywide would match it.
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