"Civil," Indeed

Mozilo Settles With SEC for $68 Million

The best way to rob a bank . . . is to own one.

There's a reason why bank robbers -- at least the "blue collar" kind -- get charged with criminal (prison) rather civil penalties (read, fines): if it were otherwise, they'd just write a check if/when they were apprehended, and go on their merry way with whatever was left, net of attorneys fees.

So, no, I'm not impressed that former Countrywide CEO Angelo Mozilo has settled, civilly, with the SEC by paying a $68 million fine.

Not only does the settlement outrageously not require Mozilo to admit guilt -- it explicitly says that he doesn't -- it allows him to keep, and enjoy, another couple hundred million he harvested even as his bank played a major role in blowing up the housing market.

FICO's Decline (& Fall?)

Credit Rating Agencies, Writ Small

As a long-time lender, I would always trade off fico for equity.

--email from Angelo Mozilo, Countrywide CEO (now charged with civil fraud), to a lieutenant

What exactly is Mozilo talking about?

Sub-prime lenders' growing concerns, circa 2006, that the size of a borrower's down payment was a much better predictor of their loan quality than their credit score as calculated by the Fair Isaac Corp. (now called "FICO").

As the housing boom wore on, such scores came to loom increasingly large in mortgage origination decisions -- much like the Triple-A ratings parceled out by Standard & Poor's and Moody's effectively became the "Good Housekeeping Seal of Approval" for trillions in mortgage-backed securities.

Unfortunately, the calculations made by both FICO and the credit rating agencies rested on the same, fatally flawed -- and for a time, very lucrative -- assumption: namely, just because something had never defaulted in mass numbers, it never would.

Un-unhh.

With respect to mortgage-backed securities, the prevailing mindset was that the risk of default to investors, always historically negligible, could be reduced even further by segregating the highest risk securities into discrete groupings or "tranches."

In FICO's case, the decision-making was at the level of the individual mortgagor (or borrower).

The fatal assumption? That consumers who had never defaulted on their debts, never would.

As now seems obvious, there's a big difference between paying your utility bills on time and owing, say, a couple grand on a few credit cards, and owing several hundred thousand (and perhaps much, much more) on a mortgage. On a house that's worth less than you owe. That you've got no equity in (and indeed, never did). When you've maybe lost your job, or are afraid you might. You get the idea . . .

Not surprisingly, the foregoing proved to be an especially combustible mix.

Lenders: 'Show me the money' (downpayment)

So now what?

At least at the moment, everyone's "back to basics":

--Only lend against good collateral, conservatively valued;
--Require borrowers to have some "skin in the game" (a sizable down payment);
--Carefully vet the borrowers' income and assets.

As Mozilo and other long-time bankers know -- and always knew, deep down -- it is those principles that are the foundation for high-quality mortgages -- not a third party's flawed, seal of approval such as FICO scores.

Mozilo's been called lots of things, but "dummy" isn't one of them (unless you count leaving behind incriminating emails).

Countrywide's Angelo Mozilo

Personal Fortune, Economic Disaster

I don't follow pro sports very closely these days, but growing up, I remember a statistic in basketball and hockey called the "plus/minus ratio."

The goal was to filter out individual statistics like goals scored or baskets made, and instead, focus on each player's net contribution to their team.

The result was something called the player's "plus/minus" ratio.

To calculate it, you added the total points scored by the player's team while he or she was on the ice (or court), then subtracted the total points scored by the opposing team.

So, a player who didn't score much, but was great on defense, would have a deceptively high plus/minus ratio.

So would a consummate team player, who unselfishly aided his or her teammates' point-scoring.

Net Minus

What makes me think of this is Angelo Mozilo, former CEO of subprime lender Countrywide, who now stands accused of (civil) fraud.

Leaving aside the particulars of the subprime business, what's clear is that Mozilo's total compensation over the last decade or so was several hundred million dollars.

Compare that to the carnage caused by the the toxic loans his company made: hundreds of thousands -- if not millions -- of foreclosures. Conservatively, say the number is 500,000.

Assuming each foreclosure costs $50,000, Mozilo's conduct arguably could be said to have cost the economy $25 billion. And that's before taking into account the human suffering, dislocation, etc. caused by all those foreclosures.

That makes Mozilo's "plus/minus" ratio a rather lopsided negative $24.5 billion. Not quite up there with Bernie Madoff (minus $50 billion), or the senior management of AIG, Merrill Lynch, or Goldman Sachs -- but a pretty staggering sum, nonetheless.

Compare that to the contributions made by a teacher, a fireman, or a talented doctor, whose pay may be nominal, but whose efforts add real wealth to the economy, and society generally.

Unlike the Angelo Mozilo's of the world, they would all score very high on the social "plus/minus" scale.

Not to mention the "financial" Hippocratic oath: 'first, do no harm.'