The Case of Countrywide Financial: The Subprime Meltdown

Intro: On its way to becoming the nations largest mortgage lender, Countrywide Financial became one of the nations largest business failures in recent decades. Founded in 1969 in part by Angelo Mozilo, it had become the largest provider of home loans in the United States, with one in every six U.S. loans being originated with Countrywide. However, Countrywides entire operation, from its computer system, to its incentive pay structure and financing arrangements, was intended to obtain maximum profits out of the mortgage lending upswing no matter what the cost was to its primary stakeholders. Countrywides primary stakeholders consisted of employees, investors, regulators, clients, communities, as well as shareholders. However, because of its ethical and operational issues, Countrywide caused adverse conditions for all stakeholders involved. Countrywides troubles and ethical issues can be traced back to the understanding of the concept of subprime mortgage lending. Subprime lending has been both a blessing and a burden to the housing industry for numerous years, which guaranteed lenders to make huge profits while taxing consumers with extreme loan terms and exorbitant interest rates. Through the mid 90s and 2000s, the number of subprime mortgage loans rose dramatically. Subprime lending means lending at a higher interest rate higher than the prime rate, often a 1 percent higher interest rate, although how far above depends on factors like credit score, down payment, debt-to-income ratio, and recent payment delinquencies. However, Countrywides failure to recognize the needs and consequences of employees, suppliers, regulators, special-interest groups, communities, and media, lead to the company failing and its eventual purchase by Bank of America Corporation. Countrywides reputation in the industry was stellar, Fortune magazine called it the 23000% stock because between 1982 and 2003, Countrywide delivered investors a 23000 percent return, exceeding the returns of Washington

Mutual, Wal-Mart, and Warren Buffetts Berkshire Hathaway, how the crisis happened ? Let me analyze the subprime mortgage crisis firstly. The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments (due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, and speculation), overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, bad monetary and housing policies, international trade imbalances, and inappropriate government regulation. Three important catalysts of the subprime crisis were the influx of moneys from the private sector, the banks entering into the mortgage bond market and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, that mortgage lenders sold directly or indirectly via mortgage brokers. On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes. Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption, vicious circle happened that nobody can survive from this economic crisis. The story of Countrywide is not over, although Bank of America offered to buy Countrywide Financial, but Bank of America has to face a amount of lawsuits of Countrywide, Bank of America also have to solve the ethical issue of this acquisition: Countrywides CEO Angelo Mozilo signed paper before the merger to protect his own interest, Angelos golden parachute means that he will get 100 million, free private jet and other benefit from Bank of America, his reason is that he created 25 billion in value for shareholders in the past time, he claim that he deserve it, besides that, As Countrywide Financial Corp.'s shares lost more than half their value in 2008, Chairman and Chief Executive Angelo Mozilo sold about $152 million in stock under a prearranged trading plan which will hurt other shareholders interest.

SWOT Analysis Strength 1. Countrywide Financial can earn quick money from growing mortgagor before subprime crisis happened. 2. People who have limit income or comparative lower credit background can get money from Countrywide to buy real-estate which boost the economy growth and push Wall Street more effective. 3. High ROE and good corporate image that help Countrywide attract a amount of investors, and also attract people who need loan.

Weaknesses: 1. Lack of internal and external control. 2. Disorder land and capital market. 3. Over consume: because House America that enabled more consumers to spend their future income to buy house that many families have no ability to pay back.

Opportunities: 1. Bank of America acquired Countrywide Financial Corporation that it can help Countrywide face lawsuits, ethical issues and operating challenge. Bank Of America Corp can now easily expand and enter international markets. There are constant improvement and up gradation of processes in the banking industry which is an opportunity for the company. 2. Bank of America also benefits from Countrywides broader mortgage capabilities, including its extensive retail, indiscriminate and correspondent

distribution networks. Countrywide operates more than 1,000 field offices and has an income force of early 15,000.

Threats: 1. Legal issue: A amount of lawsuits and negative information threat Countryside and Bank of America s future 2. Economy: The recent financial economic turmoil and increasing Unemployment are threats for the company. 3. Policy Issues: There are ever-increasing in Restrictions in capital markets .

1. Are subprime loans an unethical financial instrument, or are they ethical but misused in a way that created ethical issues? ANS: Subprime is a financial instrument that there is no right or wrong for it, derivatives can make financial market more effective, only wrong thing is financial institution misused financial instrument or mislead consumer. Countrywide in order to attract more people buy their product that ignore the risk or under estimate the potential risk, if Countrywide increase its loan standard or give people a right sign that Countrywide do not encourage over consumption, the result will be much better.

2. Discuss the ethical issues that caused the downfall of Countrywide Financial.

ANS: I think the ethical issue is how people to reconsider greed, from the case we can see that many families know their income are hard to pay the loan back but they still do that; Countrywide and other financial institution bet on the

future that they believe land price and economy will keep going up. They only see the interest but not the risk, Countrywide want to make quick money, consumer want to buy more products, Wall Street want earn more commission fees, what they do is just transfer the risk to future, but we cannot predict future exactly. However, Countrywide and other financial institution should be responsible for this crisis because they are profession, they should avoid financial crisis.

3. How should Bank of America deal with potential ethical and legal misconduct discovered at Countrywide? ANS: the potential ethical misconduct is Angelo Mozilos golden parachute, although he makes a huge profit for Countrywide in the past time, but the profit was unhealthy, his strategy sacrifice sustainability and it also hurt public interest. However law protects his interest, what I think is Bank of America should do something to limit Angelo and other managers individual interest and improve corporate image to save financial market. In addition, Bank of America should increase loan standard in the future. For the part of legal misconduct, Bank of America should fire those suspects to ease public rage.