Before we get too far from the fraud charges the Securities and Exchange Commission filed against Angelo Mozilo last week, somebody ought to note journalism’s role in all this.
It is a mistake to believe that accountability and reform come out of nowhere, or that regulators and prosecutors, left to themselves, will fulfill their functions just become, well, that’s their job. This is not the case.
Regulators operate in a context, and that context is often established by journalists. In my recent mega-piece on business-press failures in the run-up to the crash, I noted that the best journalism on Wall Street-backed subprime predations was done, surprisingly, from 2000 to 2003, a time when newspapers and regulators were equally active against an earlier subprime/predatory boomlet and together created what I call a virtuous cycle of reform. (For a stroll down memory lane, see our database of Wall Street and lender coverage, The List.) This was a time when hard-hitting reporting and uncompromised regulation brought to heel the likes of First Alliance Mortgage Co. (now closed), Household International Inc. (now part of HSBC), Citigroup (now, well, you know), and others. Great muckracking made a difference. Would that it had continued.
In that vein, it is difficult to imagine the SEC charges against Mozilo absent the work of Gretchen Morgenson of The New York Times.
Others did good work on Countrywide, to be sure (See Conde Nast Portfolio [R.I.P.] on how Mozilo sprinkled mortgage favors on the politically powerful). But Morgenson conducted the nearest thing in business journalism to a crusade, and I mean that in the best possible way, banging out more than three dozen stories, centered at the end of 2007 and beginning of 2008, that documented the predatory practices of the nation’s largest lender, the brand name of all brand names. These kinds of crusades are out of favor in the business press. Too bad.
Prior to the crash, portrayals of Mozilo dwelled on his rags-to-riches rise, Bronx-born butcher’s boy makes good. And if he was depicted as somewhat pugnacious (1) (2), well, that was just part of the All-American narrative.
But that was only part of the story, and not nearly the most important part. Spurred by ferocious demand for mortgages from Wall Street’s securitization machine, Countrywide, like its lender brethren, pushed products that Mozilo himself, we learn from the SEC’s complaint, referred to as “poison” and “toxic.”
Was Countrywide the only one? Of course not. The better part of an entire industry, we have learned, was running amok: Ameriquest (3), IndyMac (4), New Century (5), Citigroup (6), Washington Mutual (7), Wells Fargo, indeed most of the market leaders have been exposed as having turned underwriting on its head in a frenzy for mortgages to sell in the aftermarket.
But you have to start somewhere, and Mozilo was an excellent candidate to stick on a “Wanted” poster. Morgenson’s takeout in August of 2007, “Inside the Countrywide Lending Spree”, alerted a public that was just waking up to subprime catastrophe exactly what was going on in those cubicles in Calabasas, California, and in regional offices around the country.
Workdays at Countrywide’s mortgage lending units centered on an intense telemarketing effort, former employees said. It involved chasing down sales leads and hewing to carefully prepared scripts during telephone calls with prospects.
This is part of what we might call the lending industry’s boiler-room archipelago.
“The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,” the former sales representative said.
But it wasn’t just about long-form investigations, as close to my heart as those may be.
It’s also about the drumbeat: steady coverage of news events and findings by regulators and government officials that places new information into the record and, really, helps clarify in the public mind what in the word just happened, why so many mortgages—heretofore that blandest, stablest of financial instruments—are suddenly falling apart at rates never seen in their modern incarnation.
Later reporting took up the cause of borrowers trying to fend off an increasingly desperate lender stuck with the consequences of its hard-sell approach.
A story in June 2008 recounted how Countrywide was responding to the foreclosure wave—by blowing off requests from borrowers for help.
Here’s the advice one borrower got from Countrywide’s “home retention team.”
“I told her that I probably spend $10 a day on groceries,” Bailey recalls. “And she said ‘Maybe you can eat less.’ “
That was the same story in which Morgenson reported that Mozilo mistakenly hit “reply” instead of “forward” on an email so a borrower (and we) could learn of Mozilo’s true reaction to his call for help:
“This is unbelievable,” Mozilo said in his message. “Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the Internet. Disgusting.”
Disgusting indeed to be counseled by “some other person.”
Other Morgenson stories simply followed civil suits filed by states, including Illinois and California, alerting the nation that Countrywide stood accused in those states of deceiving borrowers on a mass scale and as a matter of corporate policy.
But the best work may have been those that reported on bankruptcy judges and trustees around the country who were finding that Countrywide’s predations continued even after forelosees had filed for legal protection.
One story, “Dubious Fees Hit Borrowers in Foreclosures”, reported that a bankruptcy trustee in Pittsburgh had found that Countrywide had destroyed or “lost” $500,000 in mortgage checks, then imposed penalties and fees on the borrowers.
Another reported Countrywide’s admission to a bankruptcy judge that it had “recreated” letters that purportedly been sent to borrowers that had never in fact been mailed.
The stories prompted a Senate subcommittee to look into Countrywide’s foreclosure practices, tempering its behavior. If you think the subcommitee does that on its own, you are wrong again.
The SEC’s case, by necessity, is brought on behalf of Countrywide investors, who, the agency says, weren’t told of the deteriorating loan quality that Mozilo privately decried. In a perfect word, someone would take action on behalf of borrowers, the real center of the mortgage storm.
It’s not too much to say that Morgenson put a face on a rogue industry, and it was Mozilo’s. The SEC’s case didn’t happen by accident.
1. “Countrywide Writes Mortgages for the Masses —- Dwarfed by Its Big-Bank Rivals, Company Manages to Grab Lead In White-Hot Home-Loan Market,” WSJ, 12/21/04.
2.”The Mortgage Maker Vs. The World,” NYT, 10/16/05.
3. “Workers Say Lender Ran ‘Boiler Rooms,’” LAT, 2/5/05.
4. “The House that IndyMac Built; In the low-rate days of 2003, big pension and hedge funds were hungry for higher yields – and upstarts like IndyMac were only too eager to please. Their creations became time bombs that still threaten the financial system,” The Globe and Mail, 7/19/08.
5. “Home Stretch: At a Mortgage Lender, Rapid Rise, Faster Fall —- Wall Street Fueled Growth at New Century; A Party-Hard Culture,” WSJ, 3/13/07.
6. “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South,” Southern Exposure, Summer 2003.
7. “Saying Yes, WaMu Built Empire on Shaky Loans,” NYT, 12/27/08.
Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.