All The Devils Are Here: Unmasking the Men Who Bankrupted the World (43 page)

Mozilo had long planned to retire from Countrywide at the end of 2006. He was approaching seventy years old, and he had been in the mortgage business, in one way or another, for over fifty years. Although he still held the title of CEO, he was no longer involved in the day-to-day realities of running the business, thanks in part to his undisclosed health problems. His trusted lieutenants, with whom he’d built the company, were taking charge, starting with Stan Kurland, who was his designated successor. A transition had been set in motion.

But in 2005, Mozilo began to feel better. As he regained his health, he became less sure he wanted to leave the company he often called his “baby.” Another executive recalls a conversation he had with Kurland around then. “You realize I run this company,” Kurland said to this person. “Angelo doesn’t know any of the details.” A few weeks later, this same executive was with Mozilo, who said abruptly, “All Stan is interested in is the hedging reports,” referring to the ways in which Countrywide hedged its interest rate risk. “All he does is the daily hedge. He really doesn’t want to run this company.”

Executives at Countrywide noticed another change, too. Decisions had always come from Angelo and Stan; now they came from Angelo, Stan, and Dave—Dave Sambol.

At the same time, Sambol and Kurland were increasingly disagreeing about key aspects of Countrywide’s strategy. With the Fed tightening interest rates, Kurland, fearing its effect on the housing market, wanted to pull in the horns a little, say several former executives. Sambol wanted to keep gunning for growth. And more and more Mozilo was siding with Sambol. Those in the Kurland camp felt increasingly marginalized: “2005 was tough,” says one of them. “You were always trying to say no.” One former executive recalls hearing Kurland’s voice, raised and angry, coming from his office during an apparent argument with Sambol. The culture, which had been tough to begin with, became “a culture of intimidation,” says another ex-executive. A turning
point for this executive came when he saw Drew Gissinger, the six-foot-five former San Diego Chargers offensive lineman who served as Sambol’s number two, standing over John McMurray, Countrywide’s chief risk officer, browbeating him, or so it appeared to this person. “Your chief risk guy should be the most respected person in the organization,” another former executive says, recalling the incident.
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In the fall of 2005, Countrywide’s board asked Kurland for guidance on how he envisioned dividing responsibilities with Mozilo once he became CEO. What ensued became a topic of much discussion and speculation in Countrywide’s top ranks. As other former executives recount the story, Kurland was furious. He didn’t want
any
division: either he was going to be CEO or he wasn’t. He didn’t want the title if he wasn’t going to truly be in charge, especially given that Mozilo could be a loose cannon and that Sambol, in his view, needed reining in. Kurland sent Mozilo an e-mail that became infamous in Countrywide’s upper ranks, outlining his expectations for the role Mozilo would have when he stepped down. Essentially, Kurland outlined a structure in which he would be running the company and Mozilo would assume the classic role of the ex-founder: “non-executive chairman of the board,” an honorific with no power. Kurland, says one person, was even reluctant to have Mozilo continue as the company’s spokesperson on CNBC.

The memo led to a bitter—and childish—feud between the two men, one that consumed inordinate amounts of everyone’s energy. Mozilo was deeply offended and, as the story goes, when Kurland tried to apologize, Mozilo refused to accept it. “There’s no way I deserve this after a thirty-year relationship,” Kurland told one person.

Increasingly, Kurland felt like he was fighting a losing battle on two fronts, according to someone he confided in. “A period of torture” is how this person says he described Kurland’s time at Countrywide after the feud began. As the Fed continued to increase interest rates—it did so seventeen times in a row between June 2004 and June 2006—Kurland became increasingly worried about the housing market. But within the company, he and others who felt that way were the Chicken Littles. Kurland, according to another person, also agreed with Countrywide’s supervisors at the Federal Reserve, which oversaw the holding company (while the OCC regulated
Countrywide’s bank), about the importance of both the proposed industry-wide guidance on nontraditional mortgages as well as uniform standards for appraisal practices. Both Mozilo and Sambol pushed back. Kurland told a confidant that he didn’t think he could win a battle for control with Mozilo, because the board was in the founder’s pocket. He felt that he could have gotten the executive ranks to line up behind him. But doing so would have required cutting a deal with Dave Sambol and giving him more control than Kurland wanted him to have. “Maybe I’m not cutthroat enough,” Kurland said at one point.

Finally, Kurland reached his limit, according to executives who watched the feud play out. The entire company had become obsessed with what some called “the battle at the top.” It was distracting. The company needed to be focusing its energies on the housing market, not its internal soap opera. Kurland told Mozilo that if their standoff didn’t end, it would destroy the company. Although no one on the outside knew it, by the spring of 2006 Kurland was essentially out of Countrywide’s management.

By the summer, people who paid attention to Countrywide were starting to realize that something was up. “I was in Denver with Angelo,” recalls one analyst. “We were riding in the car, and Mozilo said something to me about how unique Sambol was, that he had technical knowledge, plus he was an excellent salesman. The comment came out of the blue. I wasn’t asking about Sambol, and I began to wonder why he was telling me this. Was Sambol in the running?”

He was. In September 2006, just after the
American Banker
gave Mozilo its Lifetime Achievement Award, Countrywide announced that Stan Kurland was leaving the company and Sambol would replace him as president and COO. Mozilo would stay on as CEO until 2009, by which time he would be seventy-one. Kurland’s departure was the culmination of the estrangement that had developed between the two men, who had worked together for three decades. Kurland left without so much as a good-bye e-mail to the staff. Hurt and embittered, he told a friend that he didn’t see the point in pretending otherwise.

One former Countrywide executive recalls explaining to Mozilo why Sambol was the wrong choice: “I tried to get Angelo to appreciate where Sambol was coming from. I’d say, ‘He’s not strategic and he’s not long term.’ Angelo would just stare blankly back at me.”

But to anyone who thought about it, there wasn’t really a big mystery as
to why Mozilo had fallen so hard for Sambol. Sambol was a salesman, just like Mozilo. Sambol craved market share, just like Mozilo. He was passionate about Countrywide. He was a believer. With Sambol as president, he didn’t have to turn over the reins of his company to anyone else, not just yet. What’s more, with Sambol as his number two, Mozilo could avoid having to face the hard choices that needed to be made. Sambol didn’t seem to want to play defense, even if that’s what the company needed, as subprime madness spread and interest rates continued their ascent. In the spring of 2006, he told investors, “We’re extremely competitive in terms of our desire to win and we have a particular focus on offense.”

A few months before Kurland officially left, Mozilo had sent an e-mail to Sambol, CFO Eric Sieracki, and other executives. It could have been written by two different people. (Kurland was only CC’d.) He began the e-mail with what amounted to an acknowledgment of reality: “As we are all aware Stan has begun a major undertaking to assure that we reduce midline expenses as rapidly as possible and to be reduced at least in concert with expected revenue reductions from our production divisions.” He continued, “I want you to examine our risk profile.”

But then, as he wound it up, he displayed where his heart really was: “By the way,” he wrote, “we must continue to grow our sales force and all other businesses that keep the top line increasing particularly in the origination channels.”

In late 2006, another meeting of mortgage executives was taking place, this one in Kauai, Hawaii. This was a gathering of Washington Mutual’s top producers. As part of the festivities, a handful of WaMu employees did a skit about a funeral for one of its competitors. At the podium, one employee solemnly read a note. “For this day, we have lost one of the true legends in our industry.” As he spoke, a coffin imprinted with a logo was carried out onto the stage by four pallbearers dressed in black, wearing black sunglasses. The logo read: C
OUNTRYWIDE
.

“So many of us warned the dearly departed about the risky—some may say reckless—behavior they engaged in,” he continued. “Throwing money around like Paris Hilton and selling products they don’t really know or understand.” As the sounds of “Na Na, Na, Na, Hey Hey, Goodbye” filled the room, he added that there was a bright side to the passing of WaMu’s biggest rival: “[S]ome really scary and dangerous people won’t be on the street anymore.”

This was fiction, of course. At the time it took place, Countrywide was the biggest mortgage lender in the country. But the point was this: within the industry, it wasn’t any secret that Countrywide was out on the edge of the mortgage market, even if Mozilo himself didn’t want to believe it. Even WaMu, which was doing plenty of its own risky lending—enough to eventually bring it down—could see the excesses taking place at Countrywide.

It’s hard to know when the turning point took place at Countrywide. Risky loans were undoubtedly made on Kurland’s watch: he too pushed Countrywide’s market share ambitions. A shareholder lawsuit would later charge that Mozilo, Sambol, and Kurland were “principally responsible for [Countrywide’s] ‘culture change’ and concerted foray into leveraged and high risk lending practices.” According to this lawsuit, Kurland sold $192 million of stock from March 2004 to March 2008. But there were a few signals that lending wasn’t completely out of control. Eliot Spitzer had launched an investigation into whether Countrywide’s 2004 loans reflected racial bias. This was around the same time that Ameriquest was being investigated. In the end, Countrywide agreed to commit $3 million to consumer education—a far cry from the $325 million Ameriquest paid to settle the charges against it. One former executive says that Spitzer’s staff was crawling all over Countrywide; surely if they had discovered deeper problems, Spitzer would have come down harder on the company. (Countrywide cooperated with Spitzer, unlike J.P. Morgan, HSBC, and Wells Fargo, which took refuge in preemption.)

And at Countrywide, as with other mortgage originators, there had been a brief moment of sanity right before the Ameriquest settlement was announced. According to the
Wall Street Journal
, Countrywide was going to make it “tougher for borrowers to qualify for a 1 percent teaser rate on its option ARMs.” Internally, Kurland was pushing for that,
according to a former executive; the company also issued a “no exceptions” policy in early 2006, meaning that there would be no more exceptions to underwriting policies. Besides, the government was going to issue that guidance on nontraditional loans, and Countrywide wanted to be on the right side of that. But as it became clear that any new guidance would have no teeth—and perhaps as Kurland lost power—the moment passed.

Once Kurland was officially out the door, Sambol began taking control of Countrywide. One of the first things he did was sideline some of the company’s governance structures, such as its executive risk committee, according to a former executive. Under Kurland, the protocol had always been to meet roughly a half dozen times a year. Under Sambol, it met once. Every meeting after that was canceled. “They devalued operational excellence and overvalued their own intellect,” says another former executive.

What’s more, no sooner had Kurland left than Sambol and Mozilo decided to switch regulators, shedding the OCC and the Fed for the OTS. “This move is one of the places where they made a terrible mistake,” says a former executive. Having the Fed and the OCC regulate the company gave it a bit of a halo effect that disappeared when it moved to the OTS. And really, insulting the Fed by cutting the regulatory cord was hardly a smart move.

By the end of 2006, Countrywide’s underwriting guidelines were “wider and more aggressive than they had ever been,” the SEC later charged. In a memo Mozilo sent to the board and all the top executives on December 7, 2006, he wrote that “subprime has evolved from a sector largely comprised of borrowers with impaired credit … to a sector offering very high leverage and reduced documentation.” And he noted the following shocking facts: In 2001, Countrywide’s maximum loan size in subprime was $400,000, with a maximum loan-to-value ratio of 90 percent (meaning a 10 percent down payment). You could do a stated-documentation loan only if you were self-employed. Countrywide did not have either interest-only loans or 80/20 loans in its product line. By 2006, however, subprime borrowers could get a loan up to $1 million. The maximum loan-to-value ratio was by then 100 percent. The only qualification for doing a stated-income loan was that you were a “wage earner.” Countrywide now offered interest-only loans to borrowers whose FICO scores were as low as 560, and 80/20 loans to borrowers with 580 FICO scores. As a result, 36 percent of Countrywide’s subprime originations in 2006 were done on a stated-documentation basis, versus just 13 percent in 2001. Twenty-three percent were interest-only, and 24 percent were 80/20 loans.
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