Picking up on my previous blog comparing Angelo Mozilo's private emails and public commentsin 2006, which are part of the basis of an SEC civil case, one of the most interesting aspects of looking back is how analysts treated Countrywide management.
Mozilo, along with the two men who are now his co-defendants, former President/COO David Sambol and former CFO Eric Sieracki, spoke to analysts after reporting earnings on October 26, 2006. This was exactly one month after Mozilo purportedly wrote in an email that the company was "flying blind" about the future performance of its pay option ARM portfolio. Mozilo had expressed concern in an earlier email that loans were being originated "with disregard for process [and] compliance with guidelines."
There was no such talk of "flying blind" and "disregard" on the earnings conference call. Here is some of the q-and-a which did take place.
Countrywide management was asked by Fred Cannon of Keefe Bruyette & Woods if the company would change its underwriting criteria on nontraditional mortgages.
David Sambol told him, "Fred, we have not made any changes yet. We are in the process of analyzing the guidance currently and talking to our regulators to obtain clarification and their interpretation of various aspects of the guidance which are still unclear and needed. So we have not made any changes and at this point the impact on our volumes in that program remains uncertain."
Mozilo added: "...in the real world that these loans are performing, and you can see by the delinquency rate, these loans -- to assume that these loans will never pay off, that every one of the borrowers will achieve a 15% neg am over their original loan amount and to assume that all of them are going to retain the loans until reset and to assume that all of the loans will remain in place for 30 years is a flawed I believe a flawed assumption. We already see that a significant number of these loans pay off very early because people are using them, it appears to us now as we've had now two years to observe the conduct of people very wisely. They never get to the reset rate and never have that payment shock, a significant portion of them never get there. To assume that all of them are going to get there I just think already the evidence is clear that that is not going to happen. So I think that the entire approach to these loans has to be continuously re-examined and we will continue to make our case as to what our experience is relative to the performance of these loans. So far they have proven to be a very, very good product for both the bank and for the secondary market."
One of the more interesting aspects of these conference calls is seeing how some analysts heap praise on management.
Back on that October 2006 call, Paul Miller of Friedman, Billings Ramsey kicked off the q-and-a with: "Angelo, I just want to say this news release is the best news release you guys have had. The tables are very easy to read and there is a lot more information especially average balance sheet. I just want to thank you very much for putting that out there." He later reiterated his "Outperform" rating on the stock.
Mozilo had just had his employment contract with Countrywide extended until December 2009. Mike McMahon of Sandler O'Neill started his question with: "First, Angelo, we are glad you're staying on in an executive capacity for the next few years." Don Meader of Bear Stearns (remember that company?) said: "Angelo, it might have been said, I had to get off the line a couple of times but it's just wonderful the best news today was that you will continue to guide and lead Countrywide through 2009. I'm glad that the Board saw it that way and I just want to acknowledge that to you, Angelo. It's been a great and a great ride."
But some analysts tried to get specifics about rising delinquency rates and Countrywide's relatively small loan loss reserves.
Here is an exchange on the call between Jim Shanahan of Wachovia and both Mozilo and Sambol:
Shanahan: "Would you say that given the current economic environment and certain macrotrends that we are almost there, halfway there, still quite a bit ways more to go in terms of rising delinquency rates?"
Mozilo: "My instincts tell me that -- I think it is impossible to answer that question because, as I said, the environment is changing all the time. So for example if you had increased -- if you had a changing unemployment situation, that would have a material impact on the issue. So there's so many other factors that we have to consider. I think it is something you have to look at each quarter, look at how the portfolio is performing in this throughout the segmentations of the vintages and compare it to how the industry is doing. I don't think you can just lock in a number and say that is what we're shooting for. I think you to examine this each quarter and then match that against it and we'll report back to you how we're doing related to the industry not only in terms of vintage but also by product."
Sambol: "Let me just add to that. This is Dave Sambol. It is very tough to answer that question because there are many variables that impact the level of delinquencies. They include prepayment speeds and unemployment and home prices and importantly the direction of interest rates. So it is very tough to give you a single number. Delinquencies would range depending on all those variables."
Mozilo: "The bottom line is we can't answer your question."
Shanahan: "Got it. Just one more quick question. You've stated the delinquency levels in the bank have been in line with peers and I think that is fair. However your loss reserve ratios is well below at least several of your peers. Why not just go ahead and build that reserve to be conservative? By my math it might cost you $0.12, $0.14 to get a reserve up to 40 basis points and given the earnings power from all the other capital management and expense reduction activities, why not just send that message to investors?"
Mozilo: "Just for the hell of it, right?"
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