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Tuesday, October 02, 2007

Enron has risen from the grave
Posted by Jill | 6:03 AM
Well, not literally. But if you thought corporate governance was back in style after the Enron debacle and trials, guess again.

If you watch cable TV at night, you already know that despite the mortgage mess, Countrywide is still advertising refinance loans with the ferocity of 2005. On Sunday the New York Times business section ran an article on how Countrywide's ruthless business practices are forcing people from their homes. Today Paul Krugman explains how Countrywide's CEO largely cashed out right before the company began to go south:

You can’t especially single out Countrywide for the failure of investors to realize how much risk they were taking on — that’s a failure with many fathers, including everyone from Moody’s and Standard & Poor’s, which were far too free with their AAA ratings, to Alan Greenspan, who assured us that while there might be a bit of “froth,” there was no national housing bubble.

But Countrywide made more questionable loans than anyone else — and its postbubble behavior does stand out. As Ms. Morgenson reported in yesterday’s Times, Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal, by avoiding the costs of foreclosure, would actually work to the benefit of both sides.

Why block mutually beneficial deals? As the article points out, Countrywide can make money from the fees it charges on foreclosures, while the losses from mortgages that could have been saved, but weren’t, are borne by others.

Last but not least, since it may be the key to the whole story, is the victimization of Countrywide’s own stockholders.

Last year Mr. Mozilo’s huge compensation drew a protest from a group of shareholders including the American Federation of State, County and Municipal Employees Pension Plan. But the worst was yet to come.

In late 2006, even as Countrywide began using shareholders’ money to buy back its own stock at more than $40 a share — it’s now worth only $19 — Mr. Mozilo was selling. Between November 2006 and August 2007 — that is, during the months before investors fully realized the extent to which his company would be hurt by the subprime mortgage crisis — he unloaded $138 million worth of Countrywide’s stock.

Again, unless the stock sales lead to insider-trading charges, there’s nothing in this story that involves illegality. Still, how can it be that so soon after Enron, WorldCom and other scandals rocked the business world, we’re once again hearing about executives cashing in just before their companies are revealed as less successful than advertised? The answer, of course, is that we never dealt properly with those scandals.


If like me, you're the kind of homeowner who did the research and read the fine print, refused to succumb to the siren song of mortgage companies telling you that you qualified for a far bigger loan than you were asking to take, did the calculations and only bought what you could afford on a monthly basis even in the event of a temporary financial setback, and bought at the bottom of the market, it may be difficult to sympathize with people who ought to have known that you can't afford a $600,000 house on a $40,000 salary, no matter what the mortgage company is telling you. But in this country, the yearning for homeownership is strong, and as prices skyrocketed from 2000 to 2005, it's equally difficult to blame homebuyers for wanting to believe the man on the other side of the desk (or on the other side of the internet) who said that by taking a option interest-only ARM, you could actually afford that house of which you've dreamt for so long. After all, most of us don't do the math, don't read the fine print, and often don't understand everything about what we're signing -- and aren't encouraged to. After all, the people who handle the transaction are the experts, right? Why not believe them; they know more than we do, right?

So once again, we have the privatization of reward and the socialization of risk, with executives at best skirting the edges of legality and plunging right into the Pool of Corporate Scumbaggery™, with working- and middle-class Americans as the collateral damage.

I wonder how long it's going to take Americans to realize that Corporations Are Not Your Friend.

(UPDATED to correct Krugman link.)

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