October 15, 2010

Will Mozilo get off easy with SEC?

E. Scott Reckard of the LA Times, who was a leader in reporting on the SoCal-centric subprime scandals, reports that Angelo Mozilo, former boss of Countrywide Financial, is trying to settle with the Securities & Exchange Commision without admitting wrongdoing before his civil trial on stock fraud charges starts Tuesday:
Details of the settlement couldn't immediately be determined, although defendants in SEC cases generally settle them without admitting or denying wrongdoing.

The SEC's lawsuit, filed in June 2009, also accuses former Countrywide President David Sambol and former Chief Financial Officer Eric P. Sieracki of securities fraud. It wasn't clear whether they, too, were close to settling the lawsuit.

Mozilo attorney David Siegel, Sambol attorney Walter Brown and Sieracki attorney Shirli Weiss did not return calls seeking comment. A spokesman for the SEC's enforcement division declined to comment.

Securities fraud expert John Coffee, a professor at Columbia Law School, said a settlement could help Mozilo in fighting other civil cases arising out of the Countrywide collapse.

"Any verdict in favor of the SEC would permit private plaintiffs to free ride on it and utilize those findings in their cases," Coffee said.

A settlement, on the other hand, often doesn't require a plaintiff to admit to any wrongdoing. Coffee said it would allow Mozilo to "deny everything in other litigation."

A criminal investigation of Mozilo remains open, people with knowledge of the probe said. If the SEC case is settled, federal prosecutors will not see how the evidence against Mozilo plays out in a civil trial — which could factor into their decision on whether to bring charges. Criminal charges carry a higher standard of proof.
 
My reading of the history of the Housing Bubble is that Mozilo was something of a prime mover among corporate tycoons in that his attempt to push Countrywide's share of the mortgage market from 10% to 30% was a key factor. He wasn't just responding to the market, he had a strategic plan to push the market. The only way to get there was to take risks on marginal borrowers. 

There were always marginal firms in that business, but Mozilo wasn't an obvious crook, fool, moonshooter, or small-timer. He'd had a good business record helping build a huge business, but when his boss David Loeb stepped down and Mozilo moved up to CEO, he was overenthusiastic.

My impression is that Mozilo was fairly sincere in thinking these marginal borrowers had been underestimated.
Still, some nine figure fines and some jail time for some big names would help get the incentives less out of whack. The latter is really the only thing that can get through to financiers. Everybody figures the government can't take all your money away, you can always sock enough of it away to live on in luxury, but jail time gets people's attention.

27 comments:

Abe Fauxman said...

The S.E.C has dealt very harshly with my friend Steven Rattner, who contrary to age-old canards peddled by some of your readers, was appointed "Car Czar" only on the merits of his unique expertise and integrity.

Anonymous said...

Unfortunately the SEC only deals with civil liability. It cannot prosecute people for criminal violations. That requires a referral to the Justice Department. If the SEC is going to settle the civil charges, then a criminal prosecution is unlikely.

Lugash said...

I am Lugash.

Loeb was the finance/mortgage details/money guy. Mozilo was pure salesman. Essentially when Loeb was gone, you had a guy doing anything and everything to increase his commission running the show.

I am Lugash.

Bonus Gift said...

I agree that: "Still, some nine figure fines and some jail time for some big names would help get the incentives less out of whack. The latter is really the only thing that can get through to financiers." Possibly in a somewhat ironic twist, it looks like the "robosigning" scam may overshadow the Orange Man's travails. Given all the fraud in the financial markets, and mortgage debt markets more specifically, is it not odd that simply not being able to trace ownership of a house looks like it will bring the house of cards down (pun intended)?

some other name said...

Wait - assume he wasn't sincere; he actually knew a much higher percentage than normal would default. That "knowledge" was only common sense, right? So then how is that securities fraud as against an investor? The same common sense is available to everyone, isn't it? The meltdown was a political failure, and unless you're gonna charge him with straight political corruption, it's unfair to charge him with anything.

Whiskey said...

He will get off easy. Steve Rattner is getting off easy, no jail time, a minor pocket change fine for him. For his SEC violations. And he was Obama's Car Czar. The guy who closed down GOP or Hillary Supporter owned dealerships at GM and Chrysler, also White Male owned dealerships.

Something the TARP IG reported cost taxpayers. Rattner skated. Just as Michelle Obama has skated on politicking inside the polls.

Because there is the law for the "little people" and those for the elites.

DCThrowback said...

Apparently, freedom costs $67.5M.

http://www.latimes.com/business/la-fi-mozilo-sec-20101016,0,862177.story

Anonymous said...

Angelo Mozilo's net worth is supposedly $600 million dollars,
http://www.celebritynetworth.com/richest-businessmen/ceos/angelo-mozilo-net-worth/

That 67.5 million dollar fine is only about 11% of his net worth.



Here is a graph (Steve might like this) of the average home price in the United States from the late 1960's until 2009,
http://en.wikipedia.org/wiki/File:Median_and_Average_Sales_Prices_of_New_Homes_Sold_in_United_States_1963-2008_annual.png

Its amazing isn't it? The average price for a house in this country was about 25 thousand dollars in 1970. It had ballooned up to 300 thousand in 2008. Affordable family formation, busing, immigration, sprawl, NIMBY-groups. There are Saileresque themes all over this story. The MSM is still looking for ways to duck the whole narritave however, and to misdirect the anger to "all of us" (I.E. implying yuppies with McMansions and their credit cards somehow caused the mess by default).

The mortgage bubble burned up at least a trillion of wealth in various retirement accounts of people everywhere. These guy's stole a substantial portion of your parents' retirement. The thought that they will get to pay a 10% fee of the money they looted (Mozillo and many others were dumping their stock at least a year before anyone knew the bubble was starting to burst in various trading schemes) and remain out of prison, while not even really having to admit wrongdoing, is still a slap on the wrist.

Eric said...

My impression is that Mozilo was fairly sincere in thinking these marginal borrowers had been underestimated.
Still, some nine figure fines and some jail time for some big names would help get the incentives less out of whack.


Not only was he sincere, he was quite open about going after that segment of the market. Here was a guy who was brainwashed into thinking poor people didn't get loans because they lived in the wrong neighborhood. Stupid, but hardly criminal.

Criminalizing stupid business plans is a bad precedent to set. The investors deserve to take a fall on this one - stockholders, bondholders, banks, insurance companies... whoever was dumb enough to put money into Countrywide.

When the government prosecutes people to "send a message", not only is it inherently unjust, it doesn't work. You need look no further than China, where every year or so they round up and execute a thousand or so people for corruption. The country is no less corrupt than it was - only the people without political connections get executed. The "message", designed for the masses who aren't really paying attention, is that the government is serious about corruption. Is that really the kind of system we want?

Anonymous said...

Off Topic:

Newsweek is hysterical that some Hispanic politicians aren't friendly to amnesty for illegal aliens.

But they're getting Hispanic support -- which isn't supposed to happen! In other words, they're "voting like Americans."

Here:

http://tiny.cc/po0wx

Anonymous said...

Jail time is right. Making CEO's personally responsible for the criminal behavior of their organizations would send a real message down the chain of command.

Darwin's Sh*tlist said...

I think rewriting about one page of the U.S. Code could prevent any future systemic risk with respect to mortgages. Namely, provide that before any federally regulated entity (or subsidiary thereof) can sell a mortgage, it has to either

1) have been in existence for, say, eight years so that a payment history can be verified or

2) the borrower must have put down at least 10% of the purchase price (out of pocket, no borrowing the "down payment" with a second note).

This isn't to say that there wouldn't still be foreclosures, but they wouldn't be so common as to jeopardize the economy.

Anonymous said...

The premise is wrong. The SEC always insists that settling parties admit to fraud (or whatever the SEC is alleging) in the settlement papers. It is non-negotiable. The SEC does this knowing it will make the parties vulnerable to private civil litigation afterwards, which I've never understood because most parties would pay lots more settlement dollars to avoid having to cop to the fraud. Maybe they're taking care of their friends in the plaintiffs' bar? Anyway, I don't know the reason but it is what it is. FWIW I'm a securities lawyer and have been through this many times.

Anonymous said...

OT -- Gawker writer tells us what the boundaries of humor(less) are:

http://gawker.com/5664780/no-vince-vaughn-gay-is-not-comedy

AmericanGoy said...

"Still, some nine figure fines and some jail time for some big names would help get the incentives less out of whack"

Yeah, feel free to wake up anytime.

Also, just hyperventilated on reddit, Americans are always ready to shrilly scream for justice and honoring contract when "welfare queens" and their neighbors do not pay the bank payments (because, small technicality, banks lost the paperwork, title, and other paperwork, and then sometimes were caught FORGING these documents in an amateur fashion), but never go after the big boys - say, bankers who give themselves stratospheric bonuses.

http://www.washingtonpost.com/wp-dyn/content/article/2010/10/11/AR2010101102875.html

Reminds me of the Sakharov (I believe) story about his (involuntary) stay in a god forsaken village in Russia, and the villagers cheerfully reporting on each other if their neighbor got so much as a crumb more than them, while accepting the elite - the Party man - not having to do back breaking farm work and living the life of an Indian Raj.

Anonymous said...

Mozilo the egapitalist, or egalitarianism-milking capitalist.

Bonus Gift said...

Somebody mentioned that the Orange Man would pay. No, he is covered by an insurance policy and Bank of America will pick up the remainder (if any). No, don't expect a large campaign contributor and fellow diversity cult member to pay even an economic price let alone serve jail time. What you need for that to happen is a new administration that isn't a slave to the cult of the multicultural idiot.

Fred said...

"The S.E.C has dealt very harshly with my friend Steven Rattner..."

The scandal that snagged Rattner, Loglisci, et. al. seems almost inevitable: you've got a public servant earning ~$150k per year having huge influence over who gets to manage pieces of his state's $100 billion+ pension fund (i.e., who gets ~$150 million in annual investment management fees). So friends of the public servant set themselves up as consultants willing to introduce institutional money managers to the bureaucrat in exchange for a finder's fee.

Anonymous said...

Quick question for you: Do you envy rich financial workers?

Tanstaafl said...

Newsweek is hysterical that some Hispanic politicians aren't friendly to amnesty for illegal aliens.

But they're getting Hispanic support -- which isn't supposed to happen! In other words, they're "voting like Americans."


Nothing to see here.

Most of the interlopers came screaming, "Let me in your country, you evil racist!"

Now with so many here a handful look around and scream, "Keep those people out, you evil racist!"

That is all.

Kylie said...

Whiskey said..."Just as Michelle Obama has skated on politicking inside the polls."

At least she wasn't brandishing a night stick.

Tanstaafl said...

Quick question for you: Do you envy rich financial workers?

Financial worker is an oxymoron.

Quick question for you: Which fraud firm do you "work" for?

David Davenport said...

From http://gawker.com/5664780/no-vince-vaughn-gay-is-not-comedy

The thing is this. It is not OK to use gay as a pejorative, joking or not. I'm sorry if your hilarious comedy routines are now ruined, but it's not. It's not more OK than Vince Vaughn saying "The problem is, that car is black. Not like negro black, but y'know, black." This should be a done, decided deal. I'm so sick of people saying "Yeah, but when people say it these days, they don't really mean homosexual." That's something I can sort of believe, but honestly it doesn't really matter, right now, what an individual's intent was. The association is there and it sends a message that it's really OK for people to look at something they think is stupid and say "God, that's so Richard" or "That's so Brian" or "That's so Anderson" or whoever!...

Funny coincidence that Gawker bossperson is both non-heterosexual and non-Baptist.

Gawker.com's specialty --> dirty laundry sniffing and gossip.

Mick said...

From WSJ (//online.wsj.com/article/SB10001424052748704300604575554321099510704.html):

"Mr. Mozilo and two other former top Countrywide executives reached the settlement with the SEC... The settlement, in which Mr. Mozilo neither admitted or denied wrongdoing, will avoid the possibility that incriminating evidence would come out during the trial ..."


Why Anonymous above who claimed to be an experienced securities lawyer spills total bullsh*t?

Is he a troll masquerading as a sec lawyer or a trolling sec lawyer?

Anonymous said...

OT Merkel says multicultural society has failed:

http://www.bbc.co.uk/news/world-europe-11559451

Anonymous said...

In a hierarchy the guy at the top makes more money - everybody knows that. This bothers some people but most sensible people sooner or later realize that the great wealth of Bill Gates doesn't really mean much to them personally. A poorer Gates doesn't translate into a richer you.

Another reality is that the guy at the top of the hierarchy is also immune to prosecution. This fact of life seems to bother many on this blog.

The fall of the Roman Republic was in large measure caused by Caesar's wish to avoid prosecution. It worked. He became immune from prosecution as Dictator for Life. Alas he wasn't immune from knives.

Al Gore was never prosecuted for his Hatch Act violations, Carter was never prosecuted for a long career of corruption although a lot of his cronies were. Clinton got a pass on the rape accusations.

I don't expect Chris Dodd or Barney Frank to ever spend a day in jail. If the private industry scoundrels who are at the top of their own financial hierarchies also escape appropriate penalties - I can't manage a lot of outrage.

None of the federal office holders who created and benefited from this mortgage disaster is going to do time. So going after the CEOs just seems like "rounding up the usual suspects".

Albertosaurus

David said...

>reality is that the guy at the top of the hierarchy is also immune to prosecution. This fact of life seems to bother many on this blog.

>The fall of the Roman Republic was in large measure caused by Caesar's wish to avoid prosecution. It worked. He became immune from prosecution as Dictator for Life. Alas he wasn't immune from knives.<

I suppose it's a fact of life that we're going to fall like the Roman Republic. Shouldn't that upset us? Guess not.