Angelo Mozilo copped a plea.  Well, not really.  He made a deal with the SEC in its civil fraud case against him and his two compatriots, David Sambol and Eric Sieracki.  They also settled out.  None admitted any wrongdoing.

Mozilo, the former chief executive of Countrywide Financial, Inc., and one of its founders, has to pay a $22.5 million penalty and disgorge profits of $45 million from selling Countrywide stock.  Countrywide’s D & O insurance will pay the $45 million, with Mozilo paying the penalty.

Mozilo is said to have misled investors about the quality of the loans Countrywide was originating, and for having allowed the quality to markedly deteriorate after it began its subprime lending operation in 2005. 

He is said to have illegally profited from selling his stock in the company on the basis of insider information that loan quality was deteriorating. 

In effect, Mozilo was charged with running his company and his personal affairs as any likewise-situated businessman might.  

I don’t get insider-trading claims against insiders.  Of course insiders have inside information that is not readily available to the general public.  It’s why all sales of stock that exceed a threshold level that are made by company officers must be publicly reported by the company.   We know they are insiders.  We expect them to have inside information.  More than a few analysts specifically study duly-reported insider sales to try and ascertain why an officer sold his stock.   

Angelo Mozilo became the public face–the whipping boy, if you will–for all that ailed the mortgage origination business during the boom.  He was seen as a real-life Gordon Gecko.  The truth was less evil with not nearly as much melodrama.

Countrywide got to be the biggest player in the mortgage origination business by becoming the most efficient and technologically proficient.  Countrywide automated its closing process long before the local and regional banks, and had no trouble finding investors for its loans, not the least of which were Fannie and Freddie.   It streamlined the process so remarkably that it often took less than thirty days from loan application to closing and disbursement.  In another, less emotive and irrational age, what they did would be seen as a good thing, not evil.

But these are strange times.  Efficiencies in closing, and now foreclosing, are seen as disregard for procedures and indifference to the customers.   Nobody complained until the market imploded, but the implosion had very little to do with Countrywide specifically or more efficient closing processes generally. 

The market imploded because it became increasingly reliant for its buoyancy upon steadily-declining interest rates provided by the Federal Reserve.  Declining interest rates, i.e., a relentlessly growing money supply, can only create the illusion of demand, but the illusion creates incentives leading to oversupply.  Eventually, oversupply caused by monetary illusions gets so far ahead of demand until a crash is inevitable.  So crash it did, and Countrywide got caught in a liquidity trap, where it couldn’t roll over its short-term liabilities, and had to be absorbed by Bank of America. 

The real crime Mozilo committed is not a crime, except against wisdom and judgment.  He managed risk poorly.  He should have seen the potential for a liquidity squeeze from a mile away.  That was his job as the CEO of a financial services company.  But he didn’t, and so he got sued, not for his poor judgment, but for his selling of stock and for lying about the true quality of Countrywide’s assets.

Disregard the insider trading claim.  It’s patently bogus.  Of course he sold his stock based on insider information.  He was a frigging insider.  Did he really intentionally defraud investors about the quality of Countrywide’s assets?  If he tried, it didn’t work.  Investors abandoned the company in spades when the mortgage market melted down, refusing to roll over short-term liabilities because they didn’t trust the long assets securing them.  So where’s the crime?  Who’s the victim? 

Mozilo lost the company he spent his entire life building because of his  inability to see the risks in where the market winds were blowing.  Isn’t that punishment enough?

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