Is Countrywide too big to fail?

Today's LATimes story on the Countrywide crisis raises an interesting question: Is Countrywide -- which makes one out of every six home loans in the U.S. -- too big to fail?

"The question is, is Countrywide too large to fail? Will the Fed allow it or will it need to step in and bail it out?" Guy Cecala, publisher of Inside Mortgage Finance, told the Times.  A bailout of Countrywide would make the government's efforts to save automaker Chrysler in the 1970s look puny.  "Countrywide is more important than Chrysler was back then, particularly given the fragile state of the economy and so much tied to housing," Cecala said.

Frequent commenter Cal raises another ominous angle of this story: Yesterday saw huge shocks at two of the major employers in the Northwest Valley-Ventura County area: Countrywide (based in Calabasas) and Amgen (based in Thousand Oaks, Ventura County's largest private employer). These have been solid, growing companies employing tens of thousands of professionals in good-paying jobs.

Comments? Thoughts? Insights?

Comments

[Tim K.]

Remember - if they are too big to fail, they are also too big to subsidize.

Nothing is too big to fail. They may be too big to fail without a lot of financial pain though.

[jemarqu]

My prediction is if they fall expect a government bailout.

[Al N.]

"The bigger they are, the harder they fall" is the saying. Also, "Pride goeth before the fall" is another saying that may be apropos here. Mozilo chided others for making the very loans that his own company got embroiled in. Countrywide is about due for a fall. Why should they be any different from other corporate, political, or religious "giants" (perhaps in human estimation) who thought they were beyond the pull of gravity?

[Art]

Does this mean Countrywide will begin to unload its huge inventory of REO's to raise some cash?

[Cal]

I checked on the "too big to fail" angle and according to National Mortgage news, they are the top servicer for mortgages (which I would imagine the infrastructure easily bought by a competitor, like BofA or Wells as happened with NEW and AHM) and about 14% of originations.

What I took out of that is they aren't too big to fail. I would think regulators would be crawling all over them to make sure that they dont do anything risky with their depositers funds, but I still wouldnt want my money sitting in their account. A run on the bank just might sink them.

p.s. Im shocked we are even talking about the possibility.

[CD]

Warren Buffet is right, we live in a Capitalist Nation, no bail out.You make a mistake on your stocks, too bad.Homes were not supposed to be "stocks". Didn't you see it coming ? It was all over the internet real estate "doomer blogs" for more than a year. The NAR is the culprit here, lets ask those real estate cheer leaders what kind of cool-aid they were drinking and what tea leaves they were reading from ... Now we are finding out how much our homes are worth and how much our retirement pensions are worth. Good Luck ! Black Friday tomorrow, followed by black Monday next week.

[Par 5]

I was once a neighbor of Angelo's at Ironwood Country Club in Palm Desert and I just wanted to let him know that we could be neighbors again here in Knysna, South Africa. We have some truly extraordinary golf courses and magnificent trophy houses for the Mozilo family to invest in. He could take pointers from Comverse's Cobi Alexander successfully stalling extradition from nearby Namibia on securities charges, but let's hope it does not come to that.

On the other hand, I heard there were quie a few disgraced former CEO's living at The Vintage Club, right next door to Ironwood.

[Kathy]

If Bush allows Countrywide to be bailed out, he's going to have to explain why he's saving Mozilo's behind and not the homeowners he said last week would be on their own. And, by the way SEC, any chance you will be looking into Mozilo's options cash-outs in the last year?

[BottomFisher]

borrow/spend....borro/spen......borr/spe......bor/sp....bo/s......b/ darn! ran out!

[Jack]

Interesting stat from another financial website: mortgage resets have jumped from $22 billion at the beginning of the year to $52 billion in August 2007. But the reset rate will continue to climb to $110 billion in March 2008 before it begins to decline. That means this ride will get a whole lot bumpier in the next six months. Click on my name for a link to the page.

[Pat]

If the Fed lets Countrywide fail, then it's a message that the fundamental nature of mortgage lending and the notion of credit in general will change. Credit standards will revert to pre-piggyback conservatism.

Sure, blame the lenders for being irresponsible while offering these ridiculous loans, but consumers wanted them, needed them, to fund their over-leveraged American Dream. New Rolex? No problem, your home is a bank. Trip to Hawaii? Just pull a little more out..appreciation will take care of you.

People used to scream at the bank when they couldn't, because of their own credit issues or other factors, pull out every last dime from their home, up to 100% of its value. Now it's the big bad lenders like Countrywide who were at fault.

I love it how most of those pointing fingers at lenders now are the same ones who are living month to month on their equity..or were, anyway. You asked for these loans, consumers, you got them, and now we're finally seeing the consequences.

[jemarqu]

Everyone is pointing fingers in this mess. Home owners are pointing to the lender. The lender is pointing to the Feds. The Feds are pointing to the lenders. Its a huge mess and human greed is to blame. The funny thing is Greenspan made this mess and he is now living the good life in retirement.

[brettdl]

I will personally campaign (in my blog) against any politician or party that endorses a bailout of Countrywide, the housing industry, hedge funds, businessmen or traders. The people connected with these organizations enjoyed a high-flying lifestyle on the backs of people like us who couldn't move into a decent-sized house within 45 miles of our work place because of artificially out-of-control prices.

The vast majority of people who behaved responsibility should not pay ONE CENT of tax dollars to help those who took advantage of us.

[yours truly, johnny dollar]

Quick (like a bunny): what is the difference between Countrywide an Enron?
(please keep your essay 25-words, or less; winner will be based on
originality; decision of the judges is final.)

[MyLessThanPrimeBeef]

I was going to use a pun from one of Shakespeare's plays involving the word 'country,' but this is a family newspaper, so I think I will let it pass.

[Cal]

OT: DataQuick hasnt posted their California state report yet, last time that meant the statewide median was negative and they reported it late Friday night to miss the news cycle.

Dunno if it means anything, we shall see when they report and what was reported.

[Riposter]

brettdl represent the millions of people whose lives were damaged by the lending industry's irresponsible behavior. There were fundamentals, mass-immigration driven population growth, NIMBY-enviro anti-development constraining supply and the lowest interest rates in a generation, which already augured a robust housing market. To dump a huge amount of additional demand by abandoning sound underwriting principles in this time was to pour fuel on a price bonfire. It created massive transfers of wealth that come with speculative bubbles and those transfers won't be finished until the bubble ceases its deflation. Many people were either denied housing opportunities because they resisted these artificially driven prices or paid more than they needed to, among litany of harms that ensued. The people who caused it, the lenders and their Wall Street backers and investors, should not be bailed out. Whatever pain they reap is richly deserved. A bailout would represent a profound moral hazard to those without much in the way of morals.

Just because Countrywide is large, it shouldn't be protected. Those who might have used that lender will have to turn to other lenders whose past behavior hasn't damaged their ability to make loans. Countrywide's demise will mean more business for them. The market will sort out with clearer eyes who is deserving of trust and new standards will develop to ascertain that. When bad things happen to people who make bad judgments that is a good thing for a functioning market.

[Cal]

"A run on the bank just might sink them."-Me

WSJ article today:

"Although the FDIC guarantees deposits at Countrywide up to a limit of about $100,000, Leilani Tedeski rushed in from neighboring Woodland Hills to withdraw a $20,000 CD that matured earlier in the week. Until a few days ago, "I was thinking I would roll it over. But I am managing this for my parents, and I want to move it somewhere where I know it will be safe," Ms. Tedeski said.

She said that she has other Countrywide CDs that haven't matured, and she inquired about early withdrawal penalties. The Countrywide officer who attended to Ms. Tedeski sought to reassure her about the company's financial health and the federal insurance that applied to her deposits. Still, she said, "I will have to think about the risks of keeping the CDs," she says.

The majority of customers who camped out in the Countrywide branch were senior citizens worried about their retirement nest eggs. One man who declined to identify himself said he had just withdrawn all his deposits in Countrywide checking and savings accounts."

http://online.wsj.com/article/SB118726477832399537.html?mod=hps_us_whats_news

Could happen...

[Alden Stubblefield]

CFC did itself in on all it's own hype as the company for the little people of California.
I had gone to their head offices back in 2004, and all I saw then was that they wanted to be top dog in the lending industry.
The note that the big guy cashed in options last year of over $380,000,000. is just to much, and then ask for my help, the people of the US.
Get a job at McD's if you can.

[Greg Langer]

Countrywide is one of the finest business organizations I have ever seen. As an executive assistant to Angelo Mozilo and a co-creator of Countrywide's "House America" program(1991- 94), I witnessed first hand Angelo's commitment to making loans to Americans not then served by the mortgage market. That commitment was not based on greed, it was based on his heartfelt desire to grant more Americans the opportunity to own a home.

I know because I was there and still have a copy of his handwritten note directing the company to do more to serve this part of our population. I was very,very proud of Angelo for this commitment. It was not particularly popular at the time and took significant courage.

I wish people would be able to look past Angelo's enormous earnings and see the tens of thousands of people Countrywide has employed, the tens of millions of first time home buyers it made possible, the taxes generated by all involved and the brilliant actions of some of the finest, brightest and most dedicated business executives and other employees I have ever known, and who have a phenomenal work ethic.

Let's also remember that the people who took the loans are not children or idiots. I am certainly not a conservative, but the truth is that the problem in the sub-prime markets stems more from borrowers' inability to pay their debts than anything else. Countrywide is not a government organization designed to protect people from themselves. Did they make aggressive loans? Certainly. Are they more aggressive than other lenders, I seriously doubt it. Did grown people want the loans? Yes. Were there plenty of non-profit organizations to help them if they wanted a second opinion on the loans? Absolutely. Home ownership in our country climbed dramatically over the past 15 years. Countrywide was a prime factor in making that possible. It is a borrower's failure to act responsibly that is the root of this challenge. Countrywide is not a parent and borrowers are not children.

Personally, as a long time shareholder and former employee, I would bet on Countrywide not only surviving, but ultimately thriving as it meets this challenge, just as Angelo, the son of a butcher in Brooklyn, N.Y. has met every other business challenge he has faced over 40 years, Don't let the tan and money fool you, Angelo is a brilliant, hard working businessman who is armed with an extremely talented, intelligent, dedicated and competent team behind him. He is a fighter, true to his Brooklyn roots, which he has never forgotten.

I haven't spoken to Angelo in over13 years, but I would never bet against him. People can lambast Countrywide and Angelo as much as they want, but the truth is that virtually all of us were involved in and benefited in some way from the explosion of sub-prime lending (jobs, higher home prices, a stronger economy, etc.). Making Countrywide the scapegoat and failing to assess blame broadly is simply wrong. Easy and simple, but wrong.

Greg Langer

[yours truly, johnny dollar]

Angelo Mozilo and Ken Lay are joined at the hip.

[riposter]

Greg- allow me to paraphrase. "If I just happened to get filthy, stinking rich, it was just an accident in my selfless pursuit of helping people."

I'm not buying it. And yes people are idiots. As H.L. Mencken wrote, “No one ever went broke underestimating the intelligence of the American public.” But no, I don't want to protect the borrowers either.
It is simply untrue "that virtually all of us were involved in and benefited in some way from the explosion of sub-prime lending (jobs, higher home prices, a stronger economy, etc.)" Some people were most certainly hurt and there is hurt yet to come.

The way to allow more people to buy homes is to allow more of them to be built, not increase the number of people who can get financing, which essentially added demand to a constrained supply in a market that already had fundamentals that would be moving prices up. Driving up home prices essentially increased the value of existing assets, redistributing wealth to who already were the most fortunate.

[KLove]

In response to Greg Langer

What you said is right on... for all those people out there that want to blame the lenders for the current market.... I did not see you or hear you all complain when you were getting a home for 500k and you only make 4k a month with so much other debt to even mention but you "had to have that home.” Those lenders made it possible for you to move out of that 2-bdrm appt. So even if someone didn’t sit there and explain to you that you would more then likely have a hard time making that payment... you should have know yourself... it is your money and your life... you don’t have someone to blame besides yourself... common sense should have told you to go for the used, older, not in perfect condition house with a cheaper payment...

Far as Countrywide being to big to fail... lets all hope they are... I do not think many of you think about anything besides what is happening to you at that moment... Incase most of you do not know Countrywide is one of the largest employers in CA. As Countrywide was borrowing money yesterday, another larger lender First Magnus Financial Corp, which I worked at for 6 years a few years ago, which employed over 4000 employees shut their doors and laid off all of their employees... most of which are in CA... So as the unemployment rate keeps increasing and more and more people have no job or income to spend in the market or at the department store that you own, or the car dealership which you make your commission at, then you might think about not wanting them to fail and hope they pull through even if it is with the Govt help..

No matter how much you do not like lenders or brokers the fact is, they influence a lot around us. If the market keeps heading the way, it is and lenders keep closing their doors most people like you and your neighbor and even your boss will be affected by Countrywide if they fail....

Over the last 8 years that I have been in the industry I have met many people that are upper level executives for Countrywide, Argent, WaMu, and so forth; and let me tell you that most of them were more grounded and giving then anybody else I have ever met. Yes, they have made a lot of money the last few years, however, they also worked very hard, and had more stress put on them then most people would be able to handle... So I will finish with this as you are wishing for the downfall of Countrywide or any other lender think about this… your job, your CD’s, your mortgage, and that of your neighbors who might have been that dedicated Underwriter that just lost their job and now they cant afford their mtg payment, and when they lose their home who knows who will move in… The downfall of Countrywide will affect us all….

[yours truly, johnny dollar]

KLove, you must be one of the people who lived in the big home of the bluff until the rains sent everything to the bottom; and, you were the first to have tax payers let you rebuild on the very bluff you just came down from using 1% government loans. Homes that the rest of us tax payers (you are demanding to fund your getting back on your bluff) could afford, then or now. No KLove, you can continue to twist in the wind with all those high level executives you met at WaMu, Argent, Enron, and Countrywide. Question KLove, how many people at Countrywide once worked at Enron? Birds of a feather.

[yours truly, johnny dollar]

Dear Par 5,
the City of Indian Wells may have to reduce the population figure
on its city limit signs.