FBI reportedly investigating Countrywide

[ShotgunSteven]

LOS ANGELES - Federal authorities are investigating Countrywide Financial Corp. for securities fraud, according to media reports.

The FBI is in the early stages of an inquiry into whether company officials misrepresented its financial position and the quality of its mortgage loans, The Wall Street Journal first reported Saturday, citing law enforcement officials and finance executives with knowledge of the development.

The Justice Department is also involved in the investigation into the nation's largest mortgage lender, said the New York Times, which also cited anonymous sources who said they were not authorized to discuss ongoing criminal matters.

"We are not aware of any such investigation," Countrywide spokeswoman Susan Martin told the Times.

FBI spokesman Richard Kolko declined to confirm for the Times that an investigation had been opened.

Investigators are looking at evidence that may suggest that company executives knew their mortgage securities would see many more defaults than predicted in its public documents, one source told the Journal.

The inquiry is part of a larger probe involving as many as 15 companies and comes in the midst of the subprime mortgage crisis.

Bank of America Corp. is in the process of acquiring California-based Countrywide for about $4 billion in stock. Bank of America agreed to the acquisition in January, and the transaction is expected to close in the third quarter. A spokesman for Bank of America declined to comment.

Countrywide CEO Angelo Mozilo was one of three mortgage industry executives brought before a Congressional committee Friday to defend their exorbitant pay at a time the industry was reeling.

Congressional figures showed that Countrywide lost $1.2 billion in the third quarter of 2007 and another $422 million in the fourth quarter. The company's stock fell 80 percent between February and the end of the year.

During the same period, Mozilo received a $1.9 million salary, $20 million in stock awards contingent upon performance and sold $121 million in stock.

If this turns out to be true, what does that mean for the BofA bailout/buyout? Can they back out due to misrepresentation?

 

[Fern]

Originally posted by: ShotgunSteven
If this turns out to be true, what does that mean for the BofA bailout/buyout? Can they back out due to misrepresentation?

I would be completely shocked if they couldn't. I'm not saying they will, just that every deal like this I've seen has all kinds of such contingency clauses and allows for a due diligence period in which allows the acquiring company and it's auditors to confirm all representations made the seller etc.

Fern

 

[Jhhnn]

BofA is buying Countrywide for the same reasons that a consortium of banks bought out LTCM in 1998- if they went bust and their position had to be liquidated, the losses would take BofA down with 'em...

 

[LegendKiller]

Originally posted by: Jhhnn
BofA is buying Countrywide for the same reasons that a consortium of banks bought out LTCM in 1998- if they went bust and their position had to be liquidated, the losses would take BofA down with 'em...

Yes and no. If CFC fails, then the portfolio of assets held would have to be sold, this would put marks out onto the market, potentially causing further writedowns.

However, BoA's direct exposure is limited to 2bn flat out. The marks already on the market would likely be at or maybe even blow the rate at which CFC assets would liquidate.

BoA could be opening themselves up for much larger losses if they let it go on their own, but maybe not. It's incorrect to make such declarative statements though.

Fern, you are probably correct. I am sure they could back out of the representations and warranties were broken, especially if CFC hadn't disclosed fraudulent practices or other malfeasance.

I wouldn't mind Mozilo going to jail myself.

 

[glenn1]

Originally posted by: LegendKiller

Originally posted by: Jhhnn
BofA is buying Countrywide for the same reasons that a consortium of banks bought out LTCM in 1998- if they went bust and their position had to be liquidated, the losses would take BofA down with 'em...

Yes and no. If CFC fails, then the portfolio of assets held would have to be sold, this would put marks out onto the market, potentially causing further writedowns.

However, BoA's direct exposure is limited to 2bn flat out. The marks already on the market would likely be at or maybe even blow the rate at which CFC assets would liquidate.

BoA could be opening themselves up for much larger losses if they let it go on their own, but maybe not. It's incorrect to make such declarative statements though.

Fern, you are probably correct. I am sure they could back out of the representations and warranties were broken, especially if CFC hadn't disclosed fraudulent practices or other malfeasance.

I wouldn't mind Mozilo going to jail myself.

While I wouldn't mind seeing BAC taking a bath on the CFC buyout, I doubt we'll see that kind of justice in the world. This article gives some more info link on the deal terms, and I wouldn't be surprised if BAC execs were wearing rose colored glasses while doing their due diligence for the deal. Worse yet, I'd not be surprised if BAC tried to throw all their non-performing assets into the CFC cluster to create one huge comingled pile of crap, to hide their own fvckups.

 

[nergee]

This is nothing.....JPM states that Wall Street banks are facing a "systemic margin call".....have to come up with 325B.....
it's obvious the banks' present losses are already much bigger than they've let on, with their assets never marked to market.
the big game is over folks......

 

[LegendKiller]

Originally posted by: nergee
This is nothing.....JPM states that Wall Street banks are facing a "systemic margin call".....have to come up with 325B.....
it's obvious the banks' present losses are already much bigger than they've let on, with their assets never marked to market.
the big game is over folks......

Opinions are like assholes.

Mine is that I don't think its that bad.

 

[piasabird]

It is not illegal to pay a CEO an outrageous amount. It may be morally wrong. It is illegal for the government to tell an employer what they can or cant pay someone. If that was the case we should investigate how much some sports players make.

It is illegal to make false statements in an attempt to influence the market or to get the government to pay for a bailout. Look at the bright side, he can afford to pay big fat fine and penalties.

The way I see it is that if the CEO is making 19 million then maybe they dont need a bailout. That is my policy. A mortgage company assumed the risk so they should have to pay.

I say it is time for an external audit, and it is time to investigate everything they are doing.

 

[Jhhnn]

From Legend Killer-

Yes and no. If CFC fails, then the portfolio of assets held would have to be sold, this would put marks out onto the market, potentially causing further writedowns.

Which is what I was talking about. All the players are working very, very hard to prevent any sort of mark to market scenario. I suspect it'd ruin many, because they all have huge exposure and, even with current markdowns, those still don't reflect the reality of the market. Right now, they can still claim fantasy value for the securities in question.

We'll see more of these CYA deals, bet on that.

 

[LegendKiller]

Originally posted by: Jhhnn
From Legend Killer-

Yes and no. If CFC fails, then the portfolio of assets held would have to be sold, this would put marks out onto the market, potentially causing further writedowns.

Which is what I was talking about. All the players are working very, very hard to prevent any sort of mark to market scenario. I suspect it'd ruin many, because they all have huge exposure and, even with current markdowns, those still don't reflect the reality of the market. Right now, they can still claim fantasy value for the securities in question.

We'll see more of these CYA deals, bet on that.

No, right now they assume the securities will pay principal at par.

Keep in mind that many, if not most, of these securities will repay most, if not all, principal.

These securities aren't "worthless", they are marked down for liquidity purposes. The whole market is insanely liquidity sensitive right now and liquidity demands a premium, that premium is cheap sales.

The problem with marks is that it assumes that the party holding the security would sell at that value. NObody in their right mind would unless they absolutely have to, C doesn't.

 

[Vic]

The FBI is investigating a lot more than just C'wide.

The biggest focus of the FBI investigations in RE/mortgage right now is not lenders, but the rash of fraud, especially straw buying, that hit near the end of the boom.

 

[Jhhnn]

Nice bit of marketeering doublespeak, LK.

In normal circumstances, securities would be sold to create the liquidity you speak of. Except that nobody'll buy 'em at anywhere near par value, meaning they can't be sold, for a variety of reasons, not the least of which is that being forced to mark to market would leave many with their butts hanging out in the breeze, the rules of fractional reserve banking being what they are...

Of course C doesn't have to sell at current market value- BofA stepped in to prevent that...

Investors wised up faster than the pipeline supplying them with overvalued securities could be shut down, leaving lots of middlemen holding the bag. Investors are now trying to recoup their losses, and are rightfully shy of anything but the most solid deals, for which they'll demand a premium..

If this were about any business other than banking, it wouldn't be called a liquidity problem, it'd be called a solvency problem, and the vultures would be picking their bones for bargains...

Vic's right- The FBI smells blood in a lot of different places- it remains to be seen if political constraints prevent them from biting into the really fat targets.

 

[LegendKiller]

Originally posted by: Jhhnn
Nice bit of marketeering doublespeak, LK.

In normal circumstances, securities would be sold to create the liquidity you speak of. Except that nobody'll buy 'em at anywhere near par value, meaning they can't be sold, for a variety of reasons, not the least of which is that being forced to mark to market would leave many with their butts hanging out in the breeze, the rules of fractional reserve banking being what they are...

Of course C doesn't have to sell at current market value- BofA stepped in to prevent that...

Investors wised up faster than the pipeline supplying them with overvalued securities could be shut down, leaving lots of middlemen holding the bag. Investors are now trying to recoup their losses, and are rightfully shy of anything but the most solid deals, for which they'll demand a premium..

If this were about any business other than banking, it wouldn't be called a liquidity problem, it'd be called a solvency problem, and the vultures would be picking their bones for bargains...

Vic's right- The FBI smells blood in a lot of different places- it remains to be seen if political constraints prevent them from biting into the really fat targets.

And nice piece of internet finance armchair expert with a touch of monday morning quarterbacking.


The accounting rules of "mark to market" is fictional accounting bullshit. It assumes that if you were to sell something today that's what it would be worth, but that's only if you were to sell it. It's akin to forcing everybody who took out a mortgage and are now underwater to "true up" their mortgage by putting cash into the deal.

Would you sell that house for that loss? Would you willingly take the mark for the sake of an accounting rule?

No, it's ridiculous to think so.

Will that house be worth that amount in 10 years? No.

The BoA move had nothing to do with CDOs since CFC doesn't hold them to a large extent, Citi's exposure is CDOs and CLO/LBO loans, so your theory doesn't hold water.

The CDO/CLO/LBO marks that Citi is facing is from secondary trading from funds that have investment guidelines, or those facing margin calls on leveraged funds.

I don't think you understand the liquidity issue, which is no surprise. You think that people have to sell, which is false. The money is around, it's just chasing other things right now (wheat, oil, gold, Munis...etc)

 

[glenn1]

Originally posted by: LegendKiller

Originally posted by: Jhhnn
Nice bit of marketeering doublespeak, LK.

In normal circumstances, securities would be sold to create the liquidity you speak of. Except that nobody'll buy 'em at anywhere near par value, meaning they can't be sold, for a variety of reasons, not the least of which is that being forced to mark to market would leave many with their butts hanging out in the breeze, the rules of fractional reserve banking being what they are...

Of course C doesn't have to sell at current market value- BofA stepped in to prevent that...

Investors wised up faster than the pipeline supplying them with overvalued securities could be shut down, leaving lots of middlemen holding the bag. Investors are now trying to recoup their losses, and are rightfully shy of anything but the most solid deals, for which they'll demand a premium..

If this were about any business other than banking, it wouldn't be called a liquidity problem, it'd be called a solvency problem, and the vultures would be picking their bones for bargains...

Vic's right- The FBI smells blood in a lot of different places- it remains to be seen if political constraints prevent them from biting into the really fat targets.

And nice piece of internet finance armchair expert with a touch of monday morning quarterbacking.


The accounting rules of "mark to market" is fictional accounting bullshit. It assumes that if you were to sell something today that's what it would be worth, but that's only if you were to sell it. It's akin to forcing everybody who took out a mortgage and are now underwater to "true up" their mortgage by putting cash into the deal.

Would you sell that house for that loss? Would you willingly take the mark for the sake of an accounting rule?

No, it's ridiculous to think so.

Will that house be worth that amount in 10 years? No.

The BoA move had nothing to do with CDOs since CFC doesn't hold them to a large extent, Citi's exposure is CDOs and CLO/LBO loans, so your theory doesn't hold water.

The CDO/CLO/LBO marks that Citi is facing is from secondary trading from funds that have investment guidelines, or those facing margin calls on leveraged funds.

I don't think you understand the liquidity issue, which is no surprise. You think that people have to sell, which is false. The money is around, it's just chasing other things right now (wheat, oil, gold, Munis...etc)

As an investor, you can (if you wish) decide that mark to market is "fictional accounting bullshit." However, the folks in the CFO office who have to deal with pesky things like FASB rules and preparing the 10Q reports don't have that luxury. The current problem with mark-to-market is that no price discovery is taking place in this current environment.

 

[LegendKiller]

Originally posted by: glenn1

Originally posted by: LegendKiller

Originally posted by: Jhhnn
Nice bit of marketeering doublespeak, LK.

In normal circumstances, securities would be sold to create the liquidity you speak of. Except that nobody'll buy 'em at anywhere near par value, meaning they can't be sold, for a variety of reasons, not the least of which is that being forced to mark to market would leave many with their butts hanging out in the breeze, the rules of fractional reserve banking being what they are...

Of course C doesn't have to sell at current market value- BofA stepped in to prevent that...

Investors wised up faster than the pipeline supplying them with overvalued securities could be shut down, leaving lots of middlemen holding the bag. Investors are now trying to recoup their losses, and are rightfully shy of anything but the most solid deals, for which they'll demand a premium..

If this were about any business other than banking, it wouldn't be called a liquidity problem, it'd be called a solvency problem, and the vultures would be picking their bones for bargains...

Vic's right- The FBI smells blood in a lot of different places- it remains to be seen if political constraints prevent them from biting into the really fat targets.

And nice piece of internet finance armchair expert with a touch of monday morning quarterbacking.


The accounting rules of "mark to market" is fictional accounting bullshit. It assumes that if you were to sell something today that's what it would be worth, but that's only if you were to sell it. It's akin to forcing everybody who took out a mortgage and are now underwater to "true up" their mortgage by putting cash into the deal.

Would you sell that house for that loss? Would you willingly take the mark for the sake of an accounting rule?

No, it's ridiculous to think so.

Will that house be worth that amount in 10 years? No.

The BoA move had nothing to do with CDOs since CFC doesn't hold them to a large extent, Citi's exposure is CDOs and CLO/LBO loans, so your theory doesn't hold water.

The CDO/CLO/LBO marks that Citi is facing is from secondary trading from funds that have investment guidelines, or those facing margin calls on leveraged funds.

I don't think you understand the liquidity issue, which is no surprise. You think that people have to sell, which is false. The money is around, it's just chasing other things right now (wheat, oil, gold, Munis...etc)

As an investor, you can (if you wish) decide that mark to market is "fictional accounting bullshit." However, the folks in the CFO office who have to deal with pesky things like FASB rules and preparing the 10Q reports don't have that luxury. The current problem with mark-to-market is that no price discovery is taking place in this current environment.

Indeed, I know all too well about those accounting rules. Just wait about 3-6 months, I think you're going to see an interesting thing happen, all of these write-downs are going to start reversing.

 

[Jhhnn]

From LK-

Indeed, I know all too well about those accounting rules. Just wait about 3-6 months, I think you're going to see an interesting thing happen, all of these write-downs are going to start reversing.

Why? Do you think that the price of real estate will miraculously recover, unsold inventory just disappear, or that the median homeowner can support payments on a home priced 6X-8X their annual income?

Dream On...

And no, I don't think they have to sell at current rates, not so long as entities like BofA can step in to prevent it... maintain, at least temporarily, what is an illusion and a fundamental disconnect from reality...

And, please, don't try to make out like indirect exposure is a helluva lot different than direct exposure- Merrill found out about that when they made a margin call on that Bear Stearns hedge fund, and were then forced to choke down the "assets" rather than liquidating them... which is where this all started.

And, of course, nobody needs to liquidate yet, not when the Fed will take such paper at full value in exchange for short term cash, liquidity...

Inflating away the value of that paper, the losses it represents, and of every dollar in circulation, as well.