May 18, 2009

Mozilo Mania

Joe Weisenthal at Clusterstock is reading up on one of the central figures in predatory securitizing, Angelo Mozilo of Countrwide, the country's largest mortgage originator during the Housing Bubble. His take on it is that Mozilo wasn't a cynic, he was a believer in the profitability of lending money to traditionally underserved borrowers:

Mozilo viewed himself as something of a populist, fighting for the little guy -- as did the editors of La Opinion.

So in addition to learning that Mozilo was incredibly insecure, the article also offers a gem about Fannie Mae (FNM) and Freddie Mac (FRE) and their role in Countrywide's success:

NYT: While he is sanguine about the stock price, Mr. Mozilo remains volatile about so much else. Particularly irksome are calls by Alan Greenspan, the Federal Reserve chairman, to shrink Fannie Mae and Freddie Mac, the quasi-government institutions that buy huge numbers of mortgages from financial institutions, notably from Countrywide.

"Fannie and Freddie are a threat to his banks," Mr. Mozilo said of Mr. Greenspan, whose agency regulates big bank holding companies. By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. "If it wasn't for them," he said of Fannie and Freddie, "Wells knows they'd have us."

Wow.

Now this is damning on a couple of levels, one simple, one a bit more complex. The obvious phenomenon was that Countrywide made a gigantic business, winning market share by turning itself into an organ of the government. Courtesy of Fannie and Freddie it had an extremely low cost of capital (even Wells Fargo could barely compete, and as Warren Buffett will tell you, Wells' cost of capital is very low), and a toilet down which to flush all the loans it wanted to make.

That alone is bad.

But it's not quite true that Countrywide just saw Fannie and Freddie as trash receptacles. Countrywide was a big believe in aggressive lending, and it thought that it was engaging in good, profitable lending to people that other banks wouldn't go touch. Remember, Mozilo was a populist. He had a chip on his shoulder. And he obviously was extremely proud of the fact that he, along with some other lending pioneers, had discovered that lending to poor people with marginal credit -- people that bankers had tradtionally turned their noses up -- were profitable. Mozilo didn't see himself as just a salesman and packager of trash.

Fannie and Freddie allowed Countrywide to get big, but Mozilo thought that the core business was inherently profitable, which is why, Countrywide held onto some of its loans in order to "smooth" (read: goose) its earnings. If Mozilo just thought he was selling garbage, he wouldn't have held onto a penny of it;.

That's an empirical point that deserves more looking into -- how much did Mozilo hang onto his loans versus how much did be securitize them. But it's clear his business model was dependent upon Fannie and Freddie keeping the firehose of government-backed cheap credit flowing to him.

My published articles are archived at iSteve.com -- Steve Sailer

11 comments:

rightsaidfred said...

...the firehose of government-backed cheap credit...And now Obama is in office directing the hose of government largess. It's not the end of the world, but you can see it from here.

Anonymous said...

Successful minorities often have no psychological difficulties rationalizing their success, no matter how nefarious their activities, because they convince themselves that their own achievement in itself is an act of progressive racial advancement.

For instance, watching American Gangster it was clear Frank Lucas practically considered himself Jesse Owens, since he showed that African Americans could displace Italians from a certain business. It didn't matter to him that the business was selling poison in Harlem.

If Michelle Obama had magically been granted partnership in her corporate law firm before quitting, I have no doubt she'd view herself as a barrier breaker, and wouldn't lose sleep at night reconciling liberal beliefs with a corporate career.

For a man like Mozilo, it's sort of irrelevant to ask whether he was in it for Mozilo or honestly trying to help his community. He wanted to make money, and the justification would come later.

Humans (especially those with the salesman personality) are adept at convincing themselves that their self-interested actions are actually good for society, and minority status greatly facilitates these mental contortions.

Sammler said...

This is always the case -- that the true believer can outperform the cynic. The people who rose to the top in equity advisory during the dot-com bubble were never cynics; a cynic could mimic their contagious enthusiasm, but never fully capture it. The people who made the disastrous trades at Citi, Merrills, UBS, RBS, HSBC and so on really believed that they were making money -- lots of it -- with good investments. The true cynics will always lag behind the enthusiastic fools.

(Also, there was a widespread feeling that while someone was bound to lose money on these stupid securities, it wasn't a risk to us specifically -- for each participant's definition of "us".)

Roger Chaillet said...

I don't know Mozillo, but former co-workers worked for Countrywide here in Dallas. Not one had anything good to say about the man.

Chip on his shoulder?

I believe he is the son of a butcher. Maybe this has something to do with it.

Contemporary elites believe in socializing risk and privatizing gain, far more so than did older generations. That's why there is an alphabet soup of regulatory agencies involved in finance. It's not for insurance purposes, for that there is the private sector, but for offloading risk onto the taxpayer.

RKU said...

Successful minorities often have no psychological difficulties rationalizing their success, no matter how nefarious their activities, because they convince themselves that their own achievement in itself is an act of progressive racial advancement.
* * *
For a man like Mozilo, it's sort of irrelevant to ask whether he was in it for Mozilo or honestly trying to help his community. He wanted to make money, and the justification would come later.


Isn't Mozilo Italian? Are Italians really still considered racial "minorities" in American society these days?

I'd certainly agree that Mozilo was a "salesman" type, who sincerely wanted to make money, but I'm not sure how much he was really trying to advance his own "community".

As always, lots of the commenters here may be interested in race and ethnicity, but utterly clueless nonetheless.

I suppose that next we'll hear Hank Paulson's career at Goldman Sachs was probably motivated by a desire to advance his fellow blacks...

patrick said...

I think Mozilo is Italian rather than Latino.
He is technically white, but really orange if you have seen his picture (really bad fake and bake).

NINA said...

"Isn't Mozilo Italian? Are Italians really still considered racial "minorities" in American society these days?"

Of course not. The question isn't how we feel about the Mozilos in our midst, but rather how they feel about us. I some cases the urge to "stick it to the man" persists in spite of status and success that would have been unimaginable to their immigrant fore fathers. Ted Kennedy is an exemplar of this phenomenon and even a cursory examination of the recent political history US provides a rich trove of similar actors.

Anonymous said...

Sticking it to The Man? Nope, just greedy.

David said...

"Sticking it to The Man? Nope, just greedy."

A person can and does act from many motives.

Anonymous said...

In some cases the urge to "stick it to the man" persists in spite of status and success that would have been unimaginable to their immigrant fore fathers. YOU PEOPLE HAVE NO IDEA HOW MUCH THIS IS TRUE

It's the first wave of immigrants that did this to you. I should know, that's where I come from.

PrestoPundit said...

Can you say "Hayekian artificial boom & inevitable bust"?

Steve writes:

"it's clear his business model was dependent upon Fannie and Freddie keeping the firehose of government-backed cheap credit flowing to him."