Chapter 4

The Parasite

Angelo Mozilo as James Taggart, the businessman who corrupted government and nearly wrecked the U.S. economy

The controlling stock of Taggart Transcontinental was left to James Taggart. . . . Dagny had expected the Board of Directors to elect him. . . . They talked about his gift of “making railroads popular,” his “good press,” his “Washington ability.” He seemed unusually skillful at obtaining favors from the Legislature.

—Atlas Shrugged

Who is James Taggart?

James Taggart is one of the key antagonists in Atlas Shrugged, a corrupt businessman who, knowing that he lacks the skills required for legitimate success, uses political influence to build his business, the great railroad Taggart Transcontinental. Every corrupt move by Taggart sets in motion unintended consequences that actually damage the railroad and spill over into the rest of the economy.

Taggart’s sister Dagny, a businesswoman whose sparkling competence is set in stark contrast to her brother’s impotence, is constantly scrambling to undo the damage he causes. Whenever Dagny’s efforts succeed, James takes credit for them.

As Taggart’s web of corruption becomes increasingly unsustainable, he marries a naive shopgirl who is awed by his apparent business success. She eventually learns the truth about him, and as their marriage deteriorates, she seeks comfort from Dagny. In one of the book’s most poignant moments, the heartbroken girl tells Dagny, “But you see, I married Jim because I . . . I thought he was you.”

James Taggart is Ayn Rand’s deepest exploration of the mental state underpinning evil. She argues that her own philosophy of self-interest is rooted in the objective survival requirements of man’s life on earth as a thinking being. The opposing philosophy of collectivism and altruism undermines man’s ability to live, and those who pursue it implicitly advocate the only egalitarian state possible—death. At the climax of Atlas Shrugged, Taggart consciously realizes for the first time that his life has been dedicated to the pursuit of death, and he is driven to madness.

As he sat down at the conference table for Countrywide Financial’s quarterly earnings call on July 24, 2007, beads of sweat formed under CEO Angelo Mozilo’s starched French collar. It wasn’t the 90-degree heat outside the window of Countrywide’s Calabasas, California, headquarters that wrung perspiration from his pores, but rather the agonizing prospect of what he was about to do.

He was about to lie to his shareholders and to the world. He knew he was looking at imminent ruin, and he knew that the moment he admitted it, that very admission would make that ruin actually happen. So Mozilo sweated while he prepared himself to say whatever he had to say to keep his multibillion-dollar house of cards from collapsing for at least another couple of weeks.

What he didn’t know then was that the collapse of Countrywide was about to trigger a global near-depression, as the subprime credit bubble Mozilo did so much to create—by manipulating for decades the power of government for private gain—was to suddenly burst.

Mozilo is the man Ayn Rand warned us against exactly 50 years before that fateful 2007 earnings call: the corrupt businessman who forges an unholy alliance between capitalism and government. Rand’s literary template for Mozilo is James Taggart, the principle villain of Atlas Shrugged.

Taggart, the heir to a railroad fortune, is ambitious—hungry for power, hungry for approbation. But he lacks the energy or ability to really run or grow the railroad. So he cultivates connections in government, and uses their power to obtain subsidies for his railroad and to destroy his competitors—all the while spouting high-minded rationales based on public service. By the end of Atlas Shrugged, Taggart’s corruption and all its unintended consequences have nearly destroyed the entire U.S. economy.

Unlike Taggart, Mozilo didn’t look the part of the corporate titan. With his perma-tan face framed by platinum hair, loud pinstriped suit, flashy tie, and gleaming extra-white Guy Smiley grin, Mozilo looked more like a goodfella turned daytime game show host than the head of a publicly traded company. In truth, this son of a Bronx butcher presided over the nation’s largest mortgage lender, built from a two-man start-up at his partner’s kitchen table decades ago.

Through the years he had positioned himself as the consummate front man of the company, the guy’s guy, able to move deftly in the right circles of influence well above his lowly origins. His feelings of inferiority drove him to fight past the old-money club and eventually beat those pretentious old-school mortgage bankers at their own game. “I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he told the New York Times; “it bothered me when I was younger—their snobbery and their looking down on us.”1

If you didn’t look closely, you could admire Mozilo’s rags-to-riches story. But the reality is that competing against the well-equipped armies of traditional bankers on the sunlit field of open competition was too daunting a prospect for this squire with dreams of becoming king. Instead of facing them head-on, he’d operate from the dim shadows cast by government-induced market distortions and conduct his business through favoritism and political pull supplemented with a healthy dose of outright deceit.

Driven by a no-holds-barred marketing campaign and governmental lobbying effort, he’d turn a modest-margin business with a consumer mind share on par with a municipal utility into a popular fad with national brand-name recognition. Countrywide’s ticker symbol, CFC, would become known at one point as the “23,000% Stock”2 for a two-decade run of 30 percent average annual gains.

Mozilo was a key architect of the U.S. housing bubble—or maybe more accurately, a key arsonist whose government-subsidized subprime mortgages were the accelerant to what turned out to be a housing and credit conflagration. All along the way he’d rationalize his actions in altruistic terms of social progress. “I gave a lot of people the opportunity to realize the American dream”3 was his typical refrain. “Our unifying mission is to close the gap in minority homeownership”4 was another of his do-gooder mantras. All the while, his real aim was to skim as much vigorish as possible from high-risk loans that had little if anything to do with supporting actual home ownership.

The chief co-conspirator in Mozilo’s grand scheme was a government-sponsored enterprise (GSE) known as Fannie Mae (it, in turn, was motivated by a government co-conspirator, Barney Frank, whom we’ll meet in Chapter 6, “The Central Planner”). By buying Mozilo’s risky and sometimes fraudulent mortgages and thus freeing up Countrywide’s capital so it could solicit even more business, Fannie supplied the rocket fuel that helped Mozilo blast Countrywide from obscurity past Citigroup and Wells Fargo to the top of the mortgage heap. “If it wasn’t for them,” Mozilo said of Fannie, “Wells [Fargo] knows they’d have us.”5

Why did Fannie play along? Simply because Fannie’s government bureaucrats funneled tens of millions of these subsidized dollars into their own pockets in the form of outlandish salaries and incentive bonuses.6 “These are the most successful corporate hermaphrodites in world history,” consumer advocate Ralph Nader said of Fannie Mae and the other GSEs. “[They] report massive profits, provide their top executives with huge compensation packages and laugh all the way to the bank with government guarantees. It’s a paradigm of how to influence Washington.”7

Like James Taggart, Mozilo skillfully cultivated his buddies in Washington; that’s the one thing he was actually good at, if not downright brilliant. To make sure politicians and regulators didn’t raise an eyebrow at the deteriorating credit quality of Mozilo’s loans purchased by the agencies under their control, he’d buy off senators, congressmen, congressional staffers, lobbyists, local politicians, home builders, and law enforcement officials with sweetheart VIP mortgage deals under a program known as the Friends of Angelo. “Countrywide’s VIP loan program was a tool with which the company built its relationships with Members of Congress and Congressional staff,” read a Staff Report from the U.S. House of Representatives Committee on Oversight and Government Reform.8 “It was also a tool it used to protect its relationship with Fannie Mae.”

Back in Calabasas, he handpicked his board of directors, just like Taggart did, building what amounted to a personally controlled audience of dutiful admirers. Business qualifications? Don’t ask—Countrywide’s board included a former basketball star with nary a dribble of banking experience on his stats sheet. It was just a puppet show to provide the appearance of corporate governance and oversight. “When we had to fill a spot, I just took on the responsibility of trying to find someone” is how Mozilo explained his board makeup. “It started from me and therefore it was difficult for the board to say ‘We don’t like him.’”9

When bankers or the press pushed for GSE reform, Mozilo would rise to their defense as an “independent” industry leader operating for the social good of home ownership. “America has the world’s highest rate of homeownership because we’re the only country that has a Fannie or Freddie,” he’d cry out to the New York Times. “Nobody wins if they’re damaged or impeded. Housing is the only thing driving the economy right now.”10 When Jack Kemp, George H.W. Bush’s Department of Housing and Urban Renewal (HUD) secretary, tried to scale back some government assistance for the mortgage market in 1990, Mozilo publicly denounced him as “the worst person who could possibly have been put in that position.”11

For Mozilo, subprime lending, which began as a competitive enterprise to tap an underserved market for home financing, had devolved into a mere financial scheme. He had become the street dealer of high-risk loans sponsored by a pseudo-government kingpin who packaged and resold them in disguise, complete with a heavy guarantee unwittingly lashed to the backs of the American taxpayer. The entire cabal of players, from the home builders to the Realtors to the industry lobbyists to Mozilo and Countrywide itself, took a cut. As long as the money kept flowing, all was good in the family.

But Mozilo was sweating before that 2007 earnings conference call because the strings of personal favors done and influence purchased through the years had spun into a tangled web that now threatened to strangle him. He must have felt like James Taggart did when his railroad was falling apart, and his sister Dagny—the sparklingly competent businesswoman who actually ran the railroad—warned him, “I have no idea what sort of games you’re tangled in, you and your Board of Directors. I don’t know how many ends you’re playing against the middle, or against one another, or how many pretenses you have to keep up in how many opposite directions.”

But there was a key difference. In Atlas Shrugged, Dagny’s brilliance saved Taggart from himself, over and over. In 2007, no one could save Angelo Mozilo. During the prior year, Mozilo had become acutely aware that his reckless underwriting and market-share-at-any-cost strategy had generated a landfill of decomposing loans. “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet,” he wrote behind the shroud of internal corporate e-mail in the middle of 2006.12 The assets, he said, were “toxic,” “poison,” and “the most dangerous product in existence.” As for the prospects of his company, he privately acknowledged, “The bottom line is that we are flying blind.”13

Like a rat in a trap, for this man who had held tight to his founder’s shares since the very inception of his company decades before, the only priority was to get out. From November 2006 through August 2007, Mozilo exercised over 5.1 million stock options and sold the underlying shares for total proceeds of over $139 million.14 He had done a monumental job of secreting his gold out of the treasury, but as he sat there sweating in July 2007, ready to face his stakeholders, he wasn’t quite free and clear yet.

He knew that any pullback in business or acknowledgment of risk to the markets would expose his house of cards for what it was, and bury his remaining fortune under a crush of rubble. In 2006 Mozilo had written about his concern that a “reputational event,” as he euphemistically called it, could destroy Countrywide’s ability to offload its poison onto a marketplace tricked into thinking it was good medicine.15 All he needed was a few more months. He had to hide the truth under a facade of business as usual. Now, on the conference call in front of hundreds of analysts and members of the media, Angelo Mozilo was about to pull off the snow job of his life—a con that would make the slickest grifter blush.

“We remain optimistic at the long-term future growth prospects and profitability of the Company,” he began on a high note. “We believe that the Company is well positioned to capitalize on opportunities during this transitional period in the mortgage business, which we believe will enhance the Company’s long-term earnings growth prospects,”16 he assured the audience.

When asked point-blank by an analyst how many shares of stock he currently held, Mozilo acted like a kid caught with his hand in the cookie jar. “I don’t know the answer to that question,” he stammered. “I own, including options—I think it’s around 11 million, 12 million, something like that,” all the while knowing he held a dwindling stake of just a few million shares after a blistering selling spree during the prior nine months. (See Figure 4.1.)

Figure 4.1 Countrywide’s Stock Price History. (Left axis) Countrywide Financial (CFC) Stock Price; (right axis) Angelo Mozilo Insider Stock Sales (Value in $ Millions)

Source: United States Securities and Exchange Commission Form 4 filings

image

What about downside risks to current shareholders? “There is a limit to this in terms of our total,” Mozilo stated authoritatively. “The total residual on our balance sheet is about $400 million. If everything collapsed, that would be the extent of our residual exposure.”17 In hindsight, $400 million would have been a gift, a mere rounding error in the eventual collapse of his own creation that Mozilo knew was looming.

Just three weeks later, on August 16, Countrywide announced that it would tap its entire $11.5 billion line of credit just to meet immediate cash demands.18 Moody’s immediately downgraded the company’s senior debt to one notch above junk status, warning that further deterioration was imminent.19 Countrywide shares took their largest drop ever, surpassing even the losses borne during the crash of 1987. The same stock that Mozilo had pumped up to analysts three weeks earlier (while furiously dumping the day before at $34.22 per share) fell to the midteens.

Global stock markets went into a tailspin. Credit markets across the world froze. The Federal Reserve injected $62 billion in reserves into the market that week to boost liquidity.20 Then, on Thursday, August 17, the day after Countrywide’s meltdown, the Fed cut the discount rate by half a percentage point to 5.75 percent from 6.25 percent.21 Analysts suggested bankruptcy was possible and hinted at the prospect of a worldwide recession.

Little did they know. . . .

The Birth of Countrywide

James Taggart got his inferiority complex from being born rich, and unworthy of his fortune. Angelo Mozilo got his by being born to humble circumstances, but without any humility. He was born to immigrant parents in a Bronx rental flat in 1938. As he was growing up, his father encouraged him to follow his footsteps into the butcher’s trade, but Angelo and his mother had bigger plans. At the age of 14, his uncle helped him break into the white-collar world by arranging a job for the scrappy youngster as a messenger for a small Manhattan mortgage company. It was there that he would earn enough to pay his way through college at Fordham University. In the process, he’d rotate through all the company’s departments, learning the business from the ground up.22

In 1960, the year he graduated from college, his employer merged with the larger United Mortgage Servicing Company, headed by a man named David Loeb. Although 15 years his senior and the conservative antithesis to Mozilo’s pitchman style, Loeb would become a mentor and partner to his young protégé.

When United Mortgage was acquired in 1968, Mozilo and Loeb set out to start a business of their own. Like Taggart, Mozilo was spurred on as much by malice as by a desire to build. “I think it was vengeance,” Mozilo posited years later as his prime motivation for launching the new company. “We ran into tremendous problems with these people and were essentially forced out,” he said about the conglomerate that swallowed up his lifelong employer. “So, naturally, we were out to get them.”23

Mozilo sank his life savings of $25,000 into the venture and secured a personal bank loan for $75,000 more. Whatever else may be said about him, at least this man who conned so many Americans into going so deeply in debt wasn’t afraid to get in hock up to his eyeballs personally. Loeb invested another $300,000, and with a third partner they capitalized themselves as a private company with a total of $500,000. Just nine months later, in 1969, Mozilo and Loeb took the company public. They failed to raise the $3 million in new capital they had hoped for, but at least they got a couple of status symbols: a ticker symbol and a board of directors.24

Though they weren’t the first nonbank mortgage company, they were the most ambitious. While others in their sector were typically small local shops, Loeb and Mozilo had national aspirations. They would dub their new creation “Countrywide” to remind them daily of the prominence they hoped to achieve.

The going was tough at first. Without a banking charter, Countrywide was prohibited from taking deposits and found itself completely dependent on outside lines of credit to fund its loans. Once these credit lines were fully tapped, Countrywide had to sell the loans off of its balance sheet to generate more lending capacity. But at that early stage in the development of the mortgage market, they could sell only a small number of the mortgages that qualified for government insurance, namely Federal Housing Authority (FHA) or Veterans Administration (VA) loans.

Then, in 1970, Congress unwittingly gave the company a lifesaving jolt by allowing federal Fannie Mae to buy so-called conventional non-FHA or VA loans from private originators, and back them with an implicit government guarantee. The loans had to conform to a strict set of standards, including a borrower’s credit score, ability to repay, and loan-to-value (LTV) ratio. Despite these conservative restrictions, this single legislative change unleashed a flood of new capital for mortgage companies like Countrywide desperate to find willing buyers for the loans they originated.

In just a few years, nonbank mortgage companies like Countrywide began to overtake the commercial banks. The market share of mortgage originators like Countrywide went from near zero to 19 percent by the end of the 1980s. By 1993, they accounted for more than half of the mortgage business done in the country. In 1990, Countrywide wrote $3.6 billion of mortgages, reaping revenues of $104 million. It was still a tiny drop in the $3.4 trillion ocean of U.S. mortgage debt outstanding that year, but Countrywide was now definitely on the map.

The Loeb Years

While Mozilo pushed relentlessly for business expansion and drove for market share with entrepreneurial zeal, David Loeb, his partner and Countrywide chairman, remained largely behind the scenes, managing risk and acting as a sober check on Angelo’s hyperactive run at market dominance.25 Instead of making high-risk loans for high fees, Loeb steered the ship with a steady hand, focusing on high credit quality coupled with efficient operations.

For years, mortgage lending at Countrywide was a plain-vanilla affair. Up to 95 percent of the loans originated by the company were basic fixed-rate obligations. The company held its costs of servicing a loan to about one-third below the industry average by rolling out optical scanning equipment and automated systems that slashed manual paperwork. All of its nationwide branches were simple, low-overhead operations consisting of one loan officer and two assistants.

Even more unusual, the loan officers all earned a fixed salary instead of the industry-standard commission. Performance bonuses were based not on sales volume irrespective of the loan’s soundness, but on the number of borrower delinquencies. If branch loan officers signed up too many loans that defaulted, they’d be fired. This operating discipline cost Countrywide business at times, but it also helped keep the company’s delinquency rate below the national average. From 1985 through 1989, the portion of Countrywide’s loans that were over 90 days past due on their payments was only 0.7 percent, compared with national averages prepared by the Mortgage Bankers Association of over 0.9 percent.26 Yes, as hard as it may be to believe today, Countrywide was once a model of probity—at least under the watchful eye of David Loeb.

Mozilo was unsatisfied. Among the staff, his motto was “We don’t execute, we don’t eat.” He once told a Countrywide executive, “If you ever stop trying to make your division the biggest and the best, that’s the day you die.”27 The problem wasn’t that he pushed his people hard. The problem was that he pushed the boundaries whenever Loeb didn’t stop him.

In the 1980s, tax law changes eliminated the deductibility of interest payments on normal consumer debt like credit cards and auto loans, while mortgage interest remained tax-deductible. With his gift for slick sales angles, Mozilo realized that he could use this new asymmetry in the tax law to get people to favor deductible mortgage borrowing over other nondeductible forms of borrowing.

Thus was born the idea that one’s home is not just a residence, not even an investment—but a source of equity to borrow against, a piggy bank, an ATM. With Countrywide’s help, homeowners could extract wealth from their homes by borrowing to pay for everything from investing in junior’s college education to outright consumption of vacations, cars, boats, large-screen TVs, or anything else. Thanks in large part to Mozilo’s marketing and spurred on by declining interest rates, “refi” would enter the popular vernacular.

In 1992, refinancings accounted for 58 percent of Countrywide’s business. In 1994 they accounted for a whopping 75 percent. In many ways the refinancing boom was the result of a brilliant innovation that took advantage of a tax asymmetry and arguably created more liquidity in the overall economy. From one perspective, this was simply capitalism at work—adapting to the reality of a government-induced fiscal distortion. In the real world where such distortions exist, rational self-interest calls for the productive innovation required to adapt.

But in Atlas Shrugged we see that the heroes are doing something better than this—they are creating value de novo. It is the villains like James Taggart and his steel tycoon crony Orren Boyle who profit from adaptation—and who corrupt government specifically to create the distortions that they can adapt to, dressing up their ambitions with altruistic rhetoric. At this point Mozilo’s days of corrupting government were still in the future, but he was already limbering up his rhetoric. Relentless pushing of refi loans was cloaked in high-minded collectivist talk about the virtues of home ownership. He was already setting the stage for the next phase of his shady dealings, one that required the active assistance of the government using the banner of home ownership to shroud their corrupt arrangements.

In the meantime, to generate even more deal flow, Mozilo had another big idea. Looking at Countrywide’s already low-cost branch structure, he thought he could do even better. Rather than pay fixed salaries and overhead to staff loan officers in company branches, he pushed Countrywide to begin using independent mortgage brokers to originate loans. Usually these were refugees from the defunct savings and loan industry, local operators who already knew the grassroots markets and Realtors. Even better, they worked on 100 percent commission. If they didn’t produce, they didn’t cost Countrywide a dime.

Loeb was decidedly against his young partner’s approach. Brokers had no skin in the game. Once they passed the loan off to Countrywide and collected their fee, there was no further responsibility or recourse back to the originator. “They’re crooks,” Loeb said about brokers, with a reputation for falsifying documents for the sake of commissions. Mozilo prevailed, however, and the seeds were sown. “I think it’s going to be a big mistake”28 was Loeb’s final summation. He would prove to be dead right.

But thanks to Mozilo, the U.S. housing market would turn out to be just plain dead.

Unholy Alliance with Fannie

Longtime Democratic politico James “Jim” Johnson was named chairman and CEO of Fannie Mae in 1991. Sensing an opportunity to use his new position for personal enrichment far in excess of his previous go-around in Washington as Vice President Walter Mondale’s executive assistant, he lost no time going on the road to schmooze with potential collaborators.

Fannie’s West Coast office was strategically located just across the street from Countrywide’s headquarters, where it babysat an already significant volume of conforming loans.29 Johnson wanted even more volume to catapult his government-wage public utility into financial stardom complete with Wall Street–style bonuses for senior executives like himself.

It didn’t take long for Jim Johnson to realize that Mozilo “was the guy,” said one of Johnson’s aides. “When Jim realized how much volume Countrywide was taking down, especially in California, he made it his mission to get to know Angelo,” said the anonymous aide. “Jim knew that he had to do everything he could to make Angelo think, ‘I’m his best friend.’ If Jim was traveling to the West Coast he’d say, ‘We need to call Angelo and set up a golf game.’”30

As much as Johnson needed loan volume from Mozilo, Countrywide needed Fannie’s flow of cheap, government-subsidized cash to keep its loan machine humming. In Atlas Shrugged, James Taggart conspired with government officials and other corrupt businessmen in a dark saloon designed to look like a dank cave. Mozilo and Johnson and their cronies did it a little differently: playing golf together, flying around on Countrywide’s corporate jet, and watching plays from box seats at the Kennedy Center. But the result was the same—they concocted the beginnings of a symbiotic relationship based not on value-added business, but on gaming the system through politics and pull.

As if to cement this unholy alliance, in 1999 Fannie Mae reached a “strategic agreement” with Countrywide wherein Mozilo would sell certain Countrywide loans exclusively to Fannie. In exchange, Fannie agreed to lower its guarantee fee on Countrywide loans. The relationship tacitly amounted to a noncompete agreement, designed to lock Fannie’s sister company Freddie Mac out of the market for Countrywide’s production. But it was so much more. By striking a chummy deal with Countrywide, Johnson had bought himself a pit bull for his front yard. Feeding and sheltering the beast ensured fiercely loyal protection against any who might try to intrude on their conspiratorial collaborations. Put more tartly, Mozilo said that when Fannie catches a cold, “I catch the fucking flu.”31

To add a sweetener to the already saccharine deal, during the very time Countrywide was negotiating with its governmental benefactor, Mozilo offered and personally approved the first so-called VIP loans to employees of Fannie Mae. All told, Mozilo would make over 150 loans to Fannie employees granting below-market interest rates, reduced fees, or manual overrides to approve loans to buyers who would not have qualified under standard programs. Johnson alone would receive more than $10 million worth.32 The value to the borrower often represented hundreds of thousands of dollars over the life of the loan. If that kind of money had been handed to a politician in cash, there’d be just one word for it: bribe.

It’s not like Johnson needed the money. Yes, government pay is typically limited at the top, even for officials who run enormous agencies. The postmaster general, for example, running an agency with more than 700,000 employees and more than $65 billion in revenue, was paid a flat $175,000 a year during the time Johnson presided at Fannie.33 But during 1998, the last full year of Johnson’s tenure at Fannie Mae, he would receive $21 million in compensation.

That same year, Johnson also improperly deferred $200 million in corporate expenses to ensure that he and his subordinates received their full annual bonuses. Johnson himself received an additional $2 million in bonus money as a result. His successor, Franklin Raines, collected $1.1 million in undeserved compensation. Without Johnson cooking the books, bonuses that year would have been exactly zero.34

According to the Washington Post, Fannie Mae had become a place where former government officials and others with good political connections could go to make millions of dollars. Franklin Raines was about to get his share, and then some.35

Slide into Subprime

When David Loeb retired from Countrywide in 2000 and died a few years later in 2003, there was nobody left to hold back the scheming Mozilo. “With Countrywide, you could see there was a cultural change when it was David and Angelo to when it was just Angelo,” said Josh Rosner, a mortgage securities expert at independent research firm Graham Fisher in New York. “Before David died, he seemed to recognize the company’s future was predicated on taking risks he wasn’t comfortable with.”36

In the hypercompetitive mortgage brokerage market of the housing boom era, borrowers with solid credit and plenty of income were already saturated with plain-vanilla, low-interest loans. The only way to gain market share was to lower lending standards and tap the remaining higher-risk population. But once he’d originated them, how could Countrywide sell these riskier loans off in the vast volumes Mozilo sought? The free market would place a natural cap on the amount of risk investors were willing to take on at any given price, and that price wasn’t cheap enough for him to realize the riches he dreamed of.

For businessmen like Mozilo or Taggart, if the free market won’t play along, then it’s time to get the government involved. The timing was perfect.

Franklin Raines, Johnson’s successor at Fannie Mae, was seeking new ways of transforming the GSE from a boring but stable financial institution dedicated to making homes more affordable into a risky venture that exploited its special government status for Raines’s personal profit. Improved earnings meant multimillion-dollar bonuses for executives, but Fannie was effectively locked out of the most lucrative loans for the very reason that they were too risky. Or were they? Like Taggart and his fellow parasites in Atlas Shrugged, Mozilo and Raines together would concoct a backroom scheme to corrupt the markets and trick the nation into backing the risks they took, all the while blathering about the noble-sounding virtue of social equality.

“Everybody wins if we can increase minority homeownership, so together we’re taking on the challenge of getting more people into homes,”37 Mozilo stated in living color on a full page in Fannie Mae’s 2003 annual report, pictured wearing a flamboyant black chalk-striped suit and a garish yellow tie that made him look more like a Prohibition-era rumrunner than a mortgage banker. The report continued,

Fannie Mae shares this vision, and together we’re working harder than ever before to make homeownership accessible to more Americans. . . . Right now only 50 percent of minority families own homes. The task for companies like Countrywide is moving it from 50 percent to 80 percent. . . . As Mozilo notes, “You can’t quantify the emotional impact of home ownership in people’s lives.” So as long as there is a gap in minority and non-minority homeownership rates, Fannie Mae and Countrywide will continue to make sure all Americans have the chance to realize the dream of homeownership.

These are absolutely ludicrous statements. Never mind minorities—achieving Mozilo’s goal of 80 percent home ownership meant that a household earning $15,000 per year38 (that’s just $288 a week, regardless of the color of your skin) would own a home with all of the financial responsibilities for mortgage payments, insurance, property taxes, and upkeep. But astonishingly, no one in a position of power called Mozilo or Fannie Mae out. No member of Congress, no shareholder, and no member of the respective boards of directors challenged the premise of this socially noble-sounding rhetoric.

Mozilo had devised a deviously brilliant formula. Under the cultural creep of hypersensitive political correctness, who could possibly question a statement with the word minority in it without coming across as racist? Who could question home ownership for all without seeming elitist? But home ownership was not Mozilo’s or Raines’s real goal; it was a mere smokescreen to shroud the ill-gotten gains of a few perpetrating a grand fraud on the American people. In rich irony, the worst of the fraud would be perpetuated on the most vulnerable: the low-income minorities that Countrywide and Fannie claimed were the beneficiaries of their noble policies and programs.

“Act now to make every month National Homeownership Month,”39 Mozilo urged in Mortgage Banking magazine. Washington politicians, many already in the pocket of Countrywide as part of his VIP lending program, heeded the call.

Under pressure that Mozilo and Raines helped create, the Clinton administration ordered Fannie Mae to increase home ownership rates among low-income borrowers. To comply with the mandate, Raines lowered his company’s lending standards to include “individuals whose credit is generally not good enough to qualify for conventional loans.”40

Fannie Mae starting buying up risky subprime and Alt-A loans at an accelerating pace to meet its ever-increasing government goals. Down payment requirements fell to 3 percent, then to zero. Fannie took risky loans and bundled them together with gilt-edged ones. Wall Street was glad to buy up these mortgage cocktails without even questioning the ingredients, because Fannie Mae was deemed a government-insured behemoth “too big to fail.”41

Countrywide, for its part, had a field day. With a combination of high interest and big fees on shaky loans funded by cheap money from Fannie, Mozilo was driving a government-subsidized profit machine unwittingly backed by the American taxpayer. Whereas the profitability of a high-quality prime loan was less than one percentage point of the mortgage’s value, subprime loans produced nearly quadruple the profit.42 On some subprime loans that carried high prepayment penalties, Countrywide’s profit margins could reach 15 percent of the loan value—$75,000 on a $500,000 mortgage.

To Beg or to Bribe?

Mozilo was also working every political angle he could find to corrupt the markets in his favor and protect his personal cash cow, Fannie Mae. Referrals of VIPs with the potential to influence legislation affecting Countrywide often came from Mozilo’s man in Washington, Jimmie Williams, Countrywide’s chief lobbyist. According to a former Countrywide managing director, Sydney Lenz, Williams and Countrywide’s Washington guys routinely identified potential customers on Capitol Hill to “keep their edge,” then actively offered to buy their influence with special Friends of Angelo loan deals.43

One beneficiary was Franklin Raines himself. According to a congressional investigation, when Raines refinanced his mortgage in June 2003, his assistant telephoned Countrywide on his behalf. According to the phone message, she stated that “per Angelo, Frank needs to refi.” Countrywide gave him a full percentage point off of a million-dollar loan and waived other fees that, according to the Wall Street Journal, would have ordinarily cost Raines at least $10,000 at closing.44 The loan also represented a $215,000 reduction in cost over the life of the loan—an outright kickback not available to regular customers such as, say, a butcher like Mozilo’s father.

These weren’t just one-off deals, either. Mozilo and his team took a systematic and analytic approach to buying political power, weighing the financial cost of the favor against the potential benefit of influence on legislation or regulation. In one case during 2002, the mayor of Billings, Montana, approached Jimmie Williams about canceling the mortgage insurance he was legally obligated to pay on his home loan. During an ensuing internal e-mail discussion, Lenz blatantly laid out the cost-benefit analysis for Williams.

I’m usually in favor of settling on the side of the borrower with political influence. However, in this case, I think the MI [mortgage insurance] payment for the life of the loan has the potential of being a greater number than the Mayor of Billings Montana[’s] influence. Jimmie, since you work with the mayors, what’s your opinion?45

Williams responded by reciting the mayor’s credentials, mentioning his wife’s role at the Democratic-leaning New Republic magazine and noting he “sits on the Advisory Board of the U.S. Conference of Mayors” and he “is also very likely to hit the speaking circuit.” Ultimately the decision was made and issued via another e-mail.

Due to the Mayor’s (and his wife’s) potential influence and accessibility to media outlets and publications, offer him a refi and either give him a .25 credit toward the discount or a $500.00 credit toward closing costs. Either way, we’re showing our good faith.46

Mozilo often priced the VIP loans himself and proudly made the specialized treatment known to the recipients through notes or business cards attached to their lending documents. While hundreds of potential benefactors were members of the Friends of Angelo club, particularly troubling were those with primary responsibility to determine how Fannie and Freddie would be administered. In addition to Raines and Johnson, recipients of these buy-offs included:

At the same time Mozilo was personally granting generous preferential treatment to members of Congress, congressional staff, lobbyists, regulators, and assorted influential bureaucrats, Congress was considering legislation to reform the GSEs. The most notable reform effort died in the Senate Banking Committee, where Senator Christopher Dodd—a Friend of Angelo whose sweetheart deal saved him $75,000—was a member. Reform legislation never passed out of Dodd’s committee, let alone get voted on by Congress.54

Carnival Barker of Loans

If you had influence, you got a great deal from Countrywide. But if you were just a nobody, you still got a mortgage even if you were a deadbeat—as long as you paid Countrywide’s full-fare rates and fees. According to Countrywide’s own product list, it would lend $500,000 to a borrower rated C-minus, the second riskiest grade. It would lend to borrowers with credit scores as low as 500 out of 850. It would lend to borrowers who had filed for personal bankruptcy or those who had been delinquent for more than 90 days on a previous mortgage twice in the previous 12 months. One Countrywide manual stated that a loan could be made to a borrower even if he or she had just $550 of income left to live on each month after making the housing payments.55 If you paid the up-front fees, apparently all that Countrywide required was that the borrower exist—and if the game could have gone on a little longer, we have no doubt it would have relaxed even that last remaining standard by creating exceptions to the definition of existence itself.

Mozilo prided himself on the explosion of new products he created to lure even the most unqualified consumers into his lending trap. At one point during an investor presentation, he sounded like a carnival barker as he listed some of the 180 loan products Countrywide offered. “We have ARMs, one-year ARMs, three-year, five-year, seven- and 10-year,” he said, rapid-fire. “We have interest-only loans, pay-option loans, zero-down programs, low-, no-doc programs, fast-and-easy programs, and subprime loans.”56 For the once-staid company that had prided itself on conservative lending practices and below-average defaults, Countrywide might as well have been standing up on a packing crate with a megaphone crying, “Step right up and see the freak show!”

One particularly devious loan structure was called the pay-option adjustable-rate mortgage (ARM). A pay-option ARM allowed a borrower to pay only a fraction of the loan interest due each month and none of the principal. Designed to put the financially strapped into homes they couldn’t afford with conventional financing, the product was a disaster in the making. For starters, any payment shortfall was added to the mortgage balance, which would then grow in size and accrue interest. Even if the borrower made a down payment in a steady or rising housing market, over time the loan balance owed could easily exceed the home’s value. Then, the A in ARM meant that interest rates could adjust or reset higher—sometimes dramatically—slamming unexpected costs on a homeowner who was already hanging by the fingernails on a reduced mortgage payment.

Heroic banking executives like John Allison at Branch Banking and Trust Company (BB&T), whom we met in Chapter 3, “The Leader,” had the courage and discipline to walk away from seemingly easy profits, shunning pay-option ARMs like radioactive sludge from Chernobyl. Countrywide slurped them up with gusto because the profit on them was so huge—at least in the short term. Talking points on one internal sales document called “Pay Option A.R.M.’s Made Simple” asks, “What kinds of customers would be interested in these loans?” The answer: “Anyone who wants the lowest possible payment!” It should have read, “Anyone who wants the highest possible risk of financial ruin!” In 2005, the year of peak home prices in the housing bubble that was about to burst, pay-option ARMs accounted for over one-fifth of Countrywide’s mortgages versus just 3 percent the previous year.57

Bad loans were starting to collect like raw sewage in Countrywide’s basement, but to the outside world the picture couldn’t have seemed more glorious. By the end of 2004, Countrywide had leaped in front of Wells Fargo to be the nation’s largest mortgage company. It originated a stunning $363 billion in mortgages that year. A year later, Countrywide originated almost $500 billion in mortgages. Senior executives had taken to telling investors that Countrywide expected to originate $1 trillion worth of mortgages by 2010.58 Mozila was halfway to that goal—though without knowing it, a few steps away from the gates of hell.

Exceptions Are the Rule

Over time, even the risky borrowers of our nation became fully leveraged. So Countrywide began using more aggressive tactics—it started treating even the most creditworthy borrowers as though they were deadbeats. In other words, brokers and sales reps were encouraged to peddle risky high-commission subprime loans to customers even if they could qualify for a safer low-commission loan a notch or two up the quality scale. Mozilo incentivized his brokers with commission rates based on the value of the mortgage, not on the quality of the credit. “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,” an unnamed Countrywide sales executive said.59

Let’s say a customer with documented income, a 10 percent down payment, and a 620 credit score could qualify through the FHA for a standard 30-year fixed-rate mortgage at a payment of $1,829 a month. The very same customer priced through Countrywide would have been offered a subprime loan at $2,387 a month—a difference of $6,696 a year.60 Why would such customers pay more than necessary? Because at those rates, Countrywide would lend them more money, using exotic gimmicks like pay-option ARMs to make it seem practically as though the loan would never have to be paid back.

But ultimately, in the last gasp of the housing bubble, Countrywide wrung the last drops of commission dollars out of the exhausted marketplace by basically lending any amount of money to anybody, on any terms, provided the commissions were large enough. Subprime borrowers could get a loan up to $1 million. The maximum loan-to-value ratio was by then 100 percent. The only qualification for doing a stated-income loan—that is, a loan based on what you state your income is, not what you can actually prove it is—was that you were a “wage earner.” Countrywide offered interest-only loans to borrowers with 580 credit scores.61 According to Dave Zitting, an old-fashioned mortgage banker at Arizona-based Primary Residential, the standard became “Breathe on a mirror, and if there’s fog, you got the loan.”62

Countrywide then adopted a “matching strategy,” which committed the company to offering any product or matching any underwriting guideline available from at least one “competitor,” which included subprime lenders. If Countrywide’s stated minimum credit score for a product was 600, but a competitor’s minimum score was 560, Countrywide would reduce its minimum to 560 in order to match its competitor and make the loan. What resulted was a race to the bottom—an amalgamation of the very worst underwriting standards in the industry all under one roof. Countrywide also prohibited its loan officers from the common industry practice of referring risky loan applicants to other brokers or institutions in exchange for a small referral fee.63 These combined practices all but ensured Countrywide would become like a drain trap for the kitchen sink, catching and retaining the foulest of sludge from the market’s garbage disposal.

Despite official lending standards that were, in Countrywide’s own words, “among the most aggressive in the industry,”64 Mozilo would allow loans to be approved on an even more lax, ad hoc basis. Countrywide’s automated underwriting system, called “CLUES,” didn’t even have a “reject” option. Loans were either, (1) approved, (2) approved with caveats, or (3) “referred” to another loan desk for further consideration or manual underwriting. Manual underwriting consisted of overriding Countrywide’s own already lenient internal checks and balances on an “exception” basis. The exceptions culture, which started and ended at the top with Mozilo himself, became the rule. So when it came to creditworthiness, Countrywide may have had CLUES, but it didn’t have a clue.

After three separate attempts to underwrite failed even on an exception basis, loan applications would be referred to Countrywide’s Secondary Markets Structured Lending Desk, where no attempt at all was made to underwrite the loan. The sole criterion for approving the loan was whether the secondary marketing desk could sell it to someone else. This is the dark secret at the core of Mozilo’s otherwise seemingly impossible scam factory. How could Countrywide have made such bad loans? Simply because it immediately sold them to someone else. It’s history’s most egregious example of the “greater fool” theory of investing: it’s okay to be a fool, as long as someone else is a greater fool.

That fool was likely to be Fannie Mae. As of 2007, Countrywide alone originated 23 percent of Fannie Mae and Freddie Mac’s total volume of mortgages.65 The greatest fool, then, would ultimately be the American taxpayer. And the problem wasn’t just limited to the explicitly labeled subprime category. Countrywide’s chief risk officer, John McMurray, later revealed to analysts that Fannie would classify loans as prime to meet its affordable-housing goals even with credit scores that would typically be considered subprime. “There is a belief by many that prime FICOs [credit scores] stop at 620,” McMurray said. “That’s not the case. There are affordability programs and Fannie Mae expanded approval, as an example, that go far below 620, yet those are still considered prime.”66

In his capacity as risk officer, McMurray repeatedly lobbied the financial reporting department to disclose more information about Countrywide’s credit risks. He was unsuccessful.67 In 2007, well before that year’s first-half earnings call, he presented Mozilo and other top executives with a summary of where the company was likely to suffer losses and urged them to report it publicly. They didn’t.

Mozilo himself often personally approved loans that were in direct contravention of Countrywide’s own credit policies and underwriting guidelines. When McMurray attempted to intervene in one instance, Mozilo berated him for becoming involved in loans that Mozilo had “already approved” and asserted that Countrywide’s balance sheet was “big enough” to handle his exceptions.68

By Force or by Fraud

In the final days, Mozilo, like James Taggart in the climactic final scenes of Atlas Shrugged, seems to have suffered a complete break from business reality. No businessman truly interested in success would have done the things either man did. “When I look a homeowner in the eye, I can tell if they’ll pay,” Mozilo would tell his staff. Never mind that eye contact isn’t a proven method for measuring default risk any more than it can ID serial killers in a lineup; Countrywide didn’t even conduct personal interviews any longer as part of the loan application process.

In other instances, Mozilo seemed to genuinely believe his own irrational assumptions that the party would continue, propped up by permanently increasing asset values. “Over the entire history of this country, housing prices have never gone down nationally,” he told CNBC in early 2005, a few months before a peak in prices preceding a 35 percent drop.69

Then, in other cases, he allegedly lied outright to cover knowingly fraudulent activities of his company and their collaborators. According to a lawsuit filed by the Mortgage Guaranty Insurance Corporation (MGIC), Countrywide deliberately disregarded signs of fraud in order to increase its market share.70 By about 2006 Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans—fully a third—borrowers overstated income by more than 50 percent. Mozilo also knew that many appraisers were overstating property values to drive originations by making loans appear less risky.

“I think the primary issue has been an issue of speculation, rather than fraud,” Mozilo would tell investors in 2007. “I mean, I think, it’s probably nonexistent today, because everything has tightened up so much, that everybody’s antenna has been so sensitized to all the possibilities here that it’s pretty hard to get through the system now if you’re not telling us the truth.”71 Later evidence would reveal a dramatically different reality, including facilitation of rampant borrower, broker, appraiser, and other fraud stemming from documents riddled with materially false information.

In one case, a part-time Chicago housekeeper applied for a mortgage, truthfully telling a Countrywide loan officer that she earned just $200 per week. Instead of rejecting her application outright, the loan officer prepared a false document stating that the borrower was an employee of Paulen Auto Body Shop earning $6,833 per month. Based on the falsified paper trail, she was given a $339,000 mortgage loan; she then promptly left the United States and returned to her home in Poland without ever making a single payment.72

In another case, Countrywide gave a $350,000 loan to an illiterate California dairy worker making just $1,100 per month, by deliberately misstating his income. The loan payment alone represented four times his actual monthly pay. Another Countrywide lender gave a $398,050 loan to a woman in Ceres, California, who had been unemployed since 1988.73 These were just a few of the many jokers dealt out by Countrywide’s originators that were holding up Mozilo’s house of cards.

The Rats Flee the Ship

By 2007, the housing engine, pumped full of cheap high-octane government fuel and then run all-out for years well beyond the redline on the tachometer, finally started to sputter and smoke. Some of the latest, most egregiously reckless loans signed by the greatest fools from the dregs of the market began defaulting almost immediately, even before the ink was dry on their contracts. Housing prices in the hottest sunshine states of California, Nevada, Arizona, and Florida began to slow and then decline.

Residential real estate flippers and speculators betting on an ever greater high by chain-smoking an escalating series of unaffordable mortgages quit cold turkey, defaulted on their obligations, and walked away to suffer their own personal financial withdrawal. More than 2.2 million foreclosure filings—default notices, auction sale notices, and bank repossessions—were reported during 2007, up 75 percent from 2006.74

Countrywide saw its loan default rates spike alarmingly. As word leaked out, $15 billion of Countrywide shareholder value evaporated during the first eight months of 2007 in a major stock market sell-off. After Countrywide tapped its entire $11.5 billion line of credit, Bank of America stepped forward to inject another $2 billion just to keep Countrywide afloat. Mozilo announced plans to eliminate 10,000 to 12,000 jobs—approximately 20 percent of his workforce—and take a $125 million to $150 million pretax restructuring charge resulting from the downsizing.75

For his efforts in catapulting millions of households into homelessness and financial ruin, Mozilo was awarded a $1.9 million salary in 2007, $20 million in stock and option awards, $44,454 for use of company aircraft, $8,581 for country club fees, and $23,755 for automobile use.76

Bank of America finally bought the struggling Countrywide outright in January 2008 for an all-stock deal valued at $4.1 billion. Shareholders who had purchased Countrywide shares during the summer of 2007 after Mozilo’s conference call lost more than 80 percent of their investment. All told, Countrywide shareholders saw more than $20 billion in value go up in smoke.

Bank of America CEO Kenneth Lewis probably thought he was quite the lion of Wall Street, picking off a juicy piece of prey by acquiring a red-hot mortgage originator on the cheap in a time of turmoil. He didn’t know yet that he was to be Mozilo’s next victim, when a year later Countrywide’s toxic sludge would bring Bank of America begging to the federal government for a bailout. For now, Lewis basked in the idea of taking the reins of Countrywide from Mozilo: “Angelo has told me that he will do anything that we want him to do. I would guess that he’ll want to go have some fun.”77 Fun indeed. After the Bank of America buyout, Mozilo took home another $44 million on top of the $140 million in Countrywide stock he sold off during 2006 and 2007.78

But there was one more victim for Countrywide—the biggest one of all.

Washington, We Have a Problem

On June 30, 2008, Fannie guaranteed $619 billion—approximately 23 percent of Fannie’s book of single-family business—in so-called junk loans (i.e., subprime, Alt-A, or other risky loans knowingly misclassified in the prime category). It is likely that up to 40 percent of the mortgage volume Fannie Mae added to its single-family book of business during 2005 to 2007 consisted of these junk loans.79 Much of that volume was purchased directly from Countrywide.

Just a year earlier, Fannie had reserved less than $1.2 billion—just 0.05 percent of its entire book of business—to cover potential credit losses. In the second quarter of 2008 alone it reported $5.35 billion in credit-related expenses. At least 85 percent of its losses were related to its holdings of both subprime and Alt-A loans. It was a financial Hurricane Katrina that burst Fannie’s feeble cash levies. Worse was yet to come.80

On July 7, 2008, a Lehman Brothers research report indicated Fannie Mae and Freddie Mac were grossly undercapitalized, suggesting the two might need as much as $75 billion in new capital between them. Knowing what we know now, it’s ironic that this report would come from Lehman, which itself was so grossly undercapitalized that it would go bust two months later. Be that as it may, in July panicked stockholders dumped Fannie and Freddie shares, sending them to 16-year lows. Fannie tumbled more than 16 percent.81

Former St. Louis Federal Reserve Bank President William Poole said in a Bloomberg interview on July 10 that Fannie and Freddie were insolvent and might need a U.S. government bailout.82 A sell-off of their stocks was furious and spread into their bonds, long perceived as having the implicit backing of the U.S. government. That day Fannie shares ended down by another 14 percent. The next day, shareholder panic reached a crescendo even as both companies insisted they were adequately capitalized. Fannie bottomed out at less than $7, off from the mid-$60s just a year earlier. All told, Fannie and Freddie would deliver a shocking loss of $100 billion in shareholder value over the first eight months of 2008.83

Later that month, Treasury Secretary Henry Paulson urged Congress to grant him new authority to seize Fannie and Freddie should further catastrophe strike, arguing, “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.”84 His words backfired as soon as they escaped his lips.

While Paulson climbed the parapet to defend the GSEs and rally the market troops, investors recoiled in horror and deserted the ranks in droves. What they quickly and correctly realized was that rather than serving to protect private investment capital, Hank’s finger on the government takeover trigger guaranteed a sort of unilaterally assured destruction. If Uncle Sam nationalized the GSEs to save them, any remaining private investment interest would be instantly incinerated by the back-blast, rendering it financially worthless. Hank’s gambit, then, became a self-fulfilling prophecy. With the threat of government intervention, private investment fled. Yet without private investment, government intervention was inevitable.

As if to prove once and for all that once greater discretionary government powers are granted they will be exercised, just a few weeks later, on September 6, 2008, the U.S. government placed Fannie Mae and Freddie Mac into conservatorship—essentially a full-blown nationalization of the businesses. Together, the two GSEs guaranteed around half of the entire $12 trillion mortgage market. It was an amount equal to the entire U.S. mortgage market just seven years earlier. The very government forces that set them up to fail now deemed them too big to fail. Yet the shareholder losses would be dwarfed by the total wealth that American homeowners saw evaporate since the credit crisis started—an amount in the trillions.

By early 2010, Fannie and Freddie had received more than $126 billion in taxpayer infusions, a number that is likely to grow even greater as mortgage defaults continue to rise. Douglas Holtz-Eakin, a former director of the Congressional Budget Office, said that the collapse of Fannie and Freddie would leave taxpayers with the “single largest bill we will face in this episode.”85

In the months that followed, inquiries were launched and fingers were pointed. Opinions varied widely about the major culprit in an attempt to pin blame for the collapse on a single source. Few got it right.

Armando Falcon, the former head of Fannie’s federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), said the collapse of the companies “was clearly a failure of management” and reflected a “deeply rooted . . . culture of arrogance and greed.” Mr. Falcon asked how a business “with the most generous government subsidies possible” could be run “into the ground.”86

Ayn Rand could have explained it. As one of the heroes of Atlas Shrugged said, “There’s a way to solve every dilemma of that kind. . . . Check your premises.” In this case, the implicit premise is that government subsidies ought to help businesses prosper. But just the opposite is true: Subsidies corrupt businesses, virtually guaranteeing that they will be run “into the ground.”

Indeed, they corrupt the entire world in which businesses operate. That’s why Countrywide was destroyed under Angelo Mozilo, just as in Atlas Shrugged Taggart Transcontinental was destroyed under James Taggart. Though Taggart “had obtained a subsidy from Washington for every train that was run, not as a profit-making carrier, but as a service of ‘public equality,’” in doing so, he sucked the life out of the economy whose health was ultimately necessary for his railroad to thrive.

BB&T CEO John Allison had this principle in mind when he declared that his bank wouldn’t make loans to real estate developers whose property had been acquired by eminent domain. Sure, on paper it sounds great to back projects where otherwise unobtainable land is acquired on the cheap by government fiat. It’s the ultimate subsidy. But in the process, the sanctity of property rights is destroyed, because the original owner’s property is taken against his or her will and handed over to the developer. If there are no property rights, then of what value is the collateral banks hold against their loans? Without a legal claim on its borrowers, banks cannot exist. Some subsidy.

SEC v. Angelo Mozilo

On June 4, 2009, the Securities and Exchange Commission (SEC) filed civil charges against Angelo Mozilo in U.S. District Court for fraud and insider trading. According to court filings:

Defendant Mozilo made numerous public statements from 2005 through 2007, praising the quality of Countrywide’s underwriting and distinguishing Countrywide from subprime lenders, stating, for example:

In addition, Countrywide’s 2006 Form 10-K stated “[w]e believe we have prudently underwritten” Pay-Option ARM loans.

The paper trail reveals that Mozilo knew full well that his public statements were outright lies. On May 19, 2006, Mozilo wrote an internal e-mail to his lieutenants stating that pay-option loans presented a long-term problem “unless [interest] rates are reduced dramatically from this level and there are no indications, absent another terrorist attack, that this will happen.”87 On June 1, 2006, Mozilo advised in an e-mail that he had become aware that the pay-option ARM portfolio was largely underwritten on a reduced documentation basis and that there was evidence that borrowers were lying about their incomes in the application process.

On September 25, 2006, Mozilo wrote another e-mail, stating, “We have no way with reasonable certainty, to assess the real risk of holding these loans on our balance sheet.” In the fall of 2006, Mozilo even recommended selling Countrywide’s portfolio of pay-option ARM loans, recognizing the risks of retaining them on Countrywide’s balance sheet. Pay-option ARMs represented approximately 14 percent of Countrywide’s total loan production and 46 percent of Countrywide’s loans held for investment for the 2006 fiscal year.88

Caught on record, Mozilo couldn’t very well deny his own statements or the rock-solid time line of events. Instead, he tried to weasel his way out of the charges using what the prosecutors called “sleight of hand.” For instance, Mozilo would claim that despite his knowingly false statements, the truth about Countrywide’s mortgage loans could be found by the public in separately filed documents from four indirect subsidiaries under names like CWALT, LLC and CWHEQ, LLC.89

According to court filings, the documents contained aggregated and raw data about hundreds or thousands of loans that Countrywide had securitized while maintaining a residual financial interest. It’s a bit like saying a pharmacy rep could sell you a vial of cyanide and arsenic as a safe and effective remedy as long as raw statistics proving this claim to be a lie were buried in a canister somewhere in the state of New Jersey. Besides, even Mozilo’s statistics failed to address the bad loans Countrywide had retained in full.

The court rejected Mozilo’s spurious and desperate arguments. Rather than face a jury trial with such damning evidence stacked against him, Mozilo agreed to settle the charges of fraud and insider trading by paying $22.5 million in civil penalties in October 2010. Bank of America made up the balance of his $67.5 million total fine. It surely would have galled that would-be lion of Wall Street, Ken Lewis, to write that check—but at that point he was gone, ousted over controversies swirling around another of his toxic acquisitions, Merrill Lynch.

During his career at Countrywide, Angelo Mozilo reaped over $400 million in compensation. Even after he and his insurers paid his penalties,90 he took home a net of over a third of a billion dollars in exchange for destroying trillions of dollars of America’s wealth.

James Taggart was not so lucky; at the climax of Atlas Shrugged, he went mad. But who knows what private hell Mozilo lives in now and for the rest of his days? He knows that, like Taggart, he was never a real creator, but only a parasite. Yes, he justified himself to the world—and to himself, we suspect—with highfalutin talk about the virtues of home ownership. History’s worst despoilers have always used the language of altruism and collectivism to disguise the reality of their actions and deflect the forces that might challenge them.

Angelo Mozilo wasn’t the only James Taggart at work in the era of corruption that led to the Great Recession. And as long as the world accepts the collectivist lies that disguise parasitism behind a curtain of high-minded social ideals, he won’t be the last Taggart—and the Great Recession won’t be the last crisis our economy has to face.