Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 7-Jun-2009
SEC charges former Countrywide CEO Angelo Mozilo with fraud.

Web Log - June, 2009

SEC charges former Countrywide CEO Angelo Mozilo with fraud.

It's a perfect example of how Generation-Xers worked with Boomers to destroy the global financial system.

In August, 2007, just as the worldwide credit crisis was beginning, investors mobbed Countrywide Bank to withdraw their deposits. That was the beginning of the end for Countrywide Financial, the parent company. Countrywide had a huge portfolio of mortgages that have since turned out to be "toxic assets."

Did the people at Countrywide see this coming? Or were they as surprised as so many other people claim to be? According to fraud charges filed by the Securities and Exchange Commission (SEC) on Thursday, former CEO Angelo Mozilo had known for over a year.

Angelo Mozilo, born 1938 (in the Silent Generation), has been called by CNBC one of the "worst CEOs of all time."

Here are some excerpts from the SEC charges:

"Moments ago, the SEC charged the former CEO of Countrywide Financial - Angelo Mozilo - and two other former executives David Sambol and Eric Sieracki with securities fraud. We allege that they deliberately misled investors, and concealed from investors, disturbing trends in Countrywide business practices, including the deteriorating standards in their underwriting process, their increased risk of defaults and delinquencies, and their increasingly dark prospects for the future.

In addition, we are charging Mr. Mozilo with insider trading. According to our complaint, Mozilo raked in nearly $140 million while fully aware that Countrywide's business model was deteriorating and faced a bleak future.

This is a tale of two companies. There was the one that investors saw from the outside, allegedly characterized by prudent business practices and tightly-controlled risk. But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model. ...

While Countrywide told the world that they were "prudently underwritten," the fact is that Mozilo himself wrote in an email that Countrywide was "flying blind" when it came to how these mortgages would perform in the future.

Mozilo believed that the risk was so high that he urged Countrywide to sell its entire portfolio of PayOption ARM loans.

Mozilo also spoke at a May 6 Sanford Bernstein Conference. Mozilo said that PayOption ARM was a "sound investment" and the performance profile of the product was "well understood."

The day after the conference, Mozilo told Sambol in an e-mail that he knew that PayOption ARMs were written on a reduced documentation basis; evidence that borrowers were lying on the applications; that borrowers would reach the 115 percent cap sooner than expected; that will suffer shock that will be difficult if not impossible for many to handle, and "we can't predict what's going to happen in the next couple of years." Those concerns and trends were not disclosed to investors.

What these three men also concealed from investors was their view on the so-called 80-20 loans offered by Countrywide.

This is where one borrower gets two loans to finance 100% of the purchase price of a home.

Mozilo described this product as "toxic" "poison," and "the most dangerous product in existence."

But this view was concealed from investors, who were told that Countrywide "consistently produced quality mortgages."

All in all, the defendants knew, and acknowledged internally, what was happening at Countrywide. They understood that defaults and delinquencies would rise as a result of their aggressive tactics. ...

Meanwhile, while hiding their hand from investors, Mozilo was actively taking his own chips off the table.

We allege that Mr. Mozilo engaged in insider trading by establishing four stock sales plans while he was aware of the company's increasing credit risk and the expected poor performance of Countrywide-originated loans.

Then, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million."

This is a PERFECT illustration of many of the things I've been saying for years on this web site. Note the following:

Mozilo's crime, according to the allegations, is that, having discovered the fraudulent activities were going on, he attempted to conceal these activities, and he didn't direct his employees to stop them; and that, having discovered the activities, he engaged in insider trading to benefit from them.

OK, so then who created the fraudulent securities and wrote the "toxic" loans? There's only one possible answer -- Generation-Xers did. In most cases, Boomers were too incompetent to do it. (See "Stories of massive generational fraud and corruption continue to pour out" for a further discussion of this point.) Mozilo, born in 1938, was from the Silent generation, but in this case the effect is the same.

I keep talking on this web site about the lethal combination of greedy, nihilistic Generation-Xers and incompetent, greed Boomers. This story is a perfect example.

How did Boomers get the way they are? Recall their history.

Boomers grew up in the heady times following the end of World War II. Their mothers had survived the massive starvation and homelessness of the Great Depression, and then watched their brothers, uncles and dads get tortured on the Bataan Death March and get slaughtered on the beaches of Normandy.

So these mothers showered their newborn babies with love, affection, tons of attention, listened to their every problem, and gave them anything they wanted. By the 1960s, Boomers were accustomed to getting anything they wanted simply by asking for it -- or demanding it.

Thus, Boomers never learned to accomplish anything, and didn't learn how to govern or lead or make decisions. All they learned is how to argue with their elders, and make demands -- demands that were almost always granted. But it's their elders who accomplished everything, and made sure that everyone was taken care of.

All that love, affection and attention had worn off by the 1960s, when the Generation-Xers were born. Gen-Xers NEVER got their way, because they always had to defer to the Boomers. They were always painfully aware that they had none of the advantages that their older brothers, sisters and cousins had enjoyed. It is no exaggeration to say that Gen-Xers learned to hate Boomers.

By the 2000s, the older GI and Silent generations were mostly gone, and this left the Boomers in an aimless state. They no longer had the Silents to take care of everything, and so they looked around for someone to take the place of the Silent generation in leading and governing, and that choice fell to the Generation-Xers.

The Gen-Xers have never felt anything but contempt and hatred for the Boomers. Xers realized how much power they now had over the Boomers; Gen-X women found it particularly easy to manipulate Boomer men.

Gen-X contempt was expressed by becoming "pragmatic" -- discarding Boomer and Silent values, and doing "what works". In the financial community, this meant making a lot of money defrauding investors.

You can see how the financial crisis required BOTH the Xers and Boomers -- the Xers to perpetrate the fraud, and the Boomer bosses to go along with it, so they'd make money too. This is how the "culture of complicity" works.

If the Xers were ethical, they wouldn't have perpetrated the fraud; if the Boomers were ethical, they would have stopped the fraud from taking place. If either generation were as ethical as the Silent and GI generations had been, then the financial crisis would have been stopped.

There's another reason why the Mozilo case illustrates how the global financial crisis occurred.

As I wrote a year ago in "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news,'" experts who were complicit in originally creating the toxic assets, like Nobel Prize winner Joseph Stiglitz, are lying and making excuses, like blaming it on the news or on the Iraq war.

The universal excuse is that when these toxic assets (as they're now called) were designed in the early 2000s, no one knew that they would fail. But even if that were true in the beginning, that excuse falls apart later.

Maybe that excuse works for toxic assets sold in 2003, 2004, 2005, or even 2006. But by 2007, it was perfectly clear that the housing bubble had burst, and that interest rates were rising. So by 2007, companies like Countrywide should have stopped writing bad loans, the financial engineers should have stopped creating new toxic securities, the bank marketing departments should have stopped selling them, the ratings agencies should have stopped giving them AAA ratings, and the monoline insurance agencies should have stopped insuring them.

But that didn't happen. By 2007, the volume of toxic assets actually increased substantially, and they were designed, sold, rated and insured as before. What happened was that everyone wanted to get their fat fees and commissions before the game was up.

So as I've written in the past, this is overwhelming circumstantial evidence that massive fraud was committed in 2007, by people who knew exactly what was going on. There is no question in my mind that it could be proven that hugely illegal activities were going on, and that they could be proven in court by prosecutors who could subpoena the relevant paperwork.

The Mozilo case supports this reasoning. According to the accusations, Mozilo knew, by the end of 2006, that his employees were engaging in fraudulent activities, and his employees must have known as well. And yet, the fraudulent activities didn't stop.

The Mozilo case stands as a perfect illustration of what's gone on in the last few years, and how the Boomers and Xers have worked together, hand in hand, to destroy the global financial system, with the worst yet to come.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (7-Jun-2009) Permanent Link
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