Ex-Leaders of Countrywide Profit From Bad Loans

Some things are just distasteful.

Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

This is one.

As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.

I wonder if they think this is socialism.

But to some, it is disturbing to see former Countrywide executives in the industry again. “It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margot Saunders, a lawyer with the National Consumer Law Center, which for years has sought to place limits on what it calls abusive lending practices by Countrywide and other companies.

Distasteful. But it's capitalism, even if its uglier side.

Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that he always insisted that the loans go only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards.

Not my fault; the other guys did it.

“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”

Amen.

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

That is how some of the economic problems are going to get fixed.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

$56o face value for $43.2 in cash: a $516.8 million discount. 7.7 cents on the dollar; the other 31 cents must be for additional costs and fees. Still: 62 cents off the dollar; if the bank recovers a dime, it is all profit.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.

Well, that's good, that the government will get something.

Chutzpah? Defined.
A Wall Street Journal story details

The company has lost $27 billion in the last 15 months, has received $45 billion in cash from the Federal government, which is also guaranteeing $305 billion of the bad debt the company itself bought in its greed to make outsized profits, while neglecting to properly assess the risks involved in that strategy, and it is chafing under governmental oversight? The executives should be glad they still have jobs. And aren't in court as defendants for corporate malfeasance.

One person close to the company compared the government's role to the sword of Damocles, an ever-present evil hanging over their heads.

• FEBRUARY 25, 2009

Citigroup Chafes Under U.S. Overseers

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By MONICA LANGLEY and DAVID ENRICH

In a recent phone call with a senior government official, Citigroup Inc. Chief Executive Vikram Pandit revealed who's on top in the new world of American finance.

"Don't give up on us," Mr. Pandit said, pleading with the official not to push out top management. "Give us a chance to execute."

Mr. Pandit is on the verge of ceding yet more control to the government. Citigroup is in talks with federal officials about the U.S. taking greater ownership of the bank by converting its 7.8% stake of preferred shares to as much as 40% of Citigroup's common stock. Doing so would give the wobbling bank a desperately needed boost to its capital, but less control of its destiny.

Citigroup's request could also heighten political pressure to break up the financial titan, whose 1998 creation helped to dismantle the Depression-era law separating the banking and brokerage industries. For taxpayers, Citigroup's quest carries peril, because holders of common shares have the last claim to repayment in the event of a corporate liquidation.

Interviews with more than 30 banking-industry executives, regulators, government officials and others show that the U.S.-Citigroup relationship, one of the most important products of the American financial-system bailout, is off to a very rocky start.

Citigroup executives are attempting to strike a seemingly impossible balance: Run the business in a way that will please their new federal masters, but also help the bank rebound from $28 billion in losses over the past five quarters.

Former federal officials have dubbed Citigroup the "Death Star," comparing the bank's threat to the financial system with the planet-destroying super weapon in the "Star Wars" movies. Privately, in the words of one official, they regard the banking giant as "unmanageable."

Complicating the issue is the government's back-and-forth between bouts of micromanaging the banking giant and periods of ignoring it. In trying to be neither an active nor a passive investor, the U.S. is directing the business without a firm strategy or particular expertise.

Government Micromanagement of Citigroup

4:06

WSJ's David Enrich discusses the latest on Citigroup, which is in talks with federal officials about the U.S. taking greater ownership of the bank. Plus, he tells colleague Dennis Berman how Citigroup is chafing under government leadership, and sometimes, its lack of leadership.

Government and the Citi

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Vikram Pandit, CEO of Citigroup, testifies on the TARP funds before the House Financial Services Committee at the US Capitol in Washington, DC.

Central to the confusion: There's no one individual or entity in charge of the federal oversight of Citigroup.

That's because banks like Citigroup are regulated by a patchwork of agencies including the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The Treasury Department also has oversight because it's the one that is injecting government capital into the banks. And members of Congress, who initially approved all that money, have their own stake in how things play out. All these interested parties have been handing Citigroup a jumble of sometimes conflicting orders, advice and critiques.

Officials with the Fed, for instance, informed Citigroup executives they have "observer rights" that entitle them to participate in the bank's board meetings. Though the government hasn't joined in so far, the fact that it might has led some Citigroup executives to complain privately that the U.S. now has "unlimited power" over the bank. One person close to the company compared the government's role to the sword of Damocles, an ever-present evil hanging over their heads.

A Citigroup spokeswoman said: "It has always been the case that when regulators ask to make a presentation to our board, we accommodate them."

On Tuesday, Mr. Pandit was in Washington for meetings with federal regulators and other officials, as questions loomed about his future and that of the company's board. Citigroup bankers sought to calm nervous clients this week. Some are worried about losing business during the uncertainty.

The federal government's new role in American finance has been staggering. In the past six months, the U.S. has injected nearly $200 billion into 419 banking institutions; guaranteed at least $420 billion in potential losses at multiple banks; directed several financial firms to merge; and has outlined plans to buy hundreds of billions of dollars in bad mortgages and other bad assets from banks. The U.S. also has agreed to prop up the commercial-paper market by buying more than $1 trillion of companies' short-term debt.

Overhaul of Bailout

Besides the Citigroup move, the government's latest to-do list includes an overhaul of its $150 billion bailout of American International Group Inc. Starting this week, banking regulators will conduct "stress tests" to gauge the health of the nation's top 20 banks. And in the coming weeks, the government plans to orchestrate a restructuring of the nation's auto industry, after loaning a total of $17.4 billion to General Motors Corp. and Chrysler LLC, both of which are now seeking billions more.

Citigroup's bid for yet more help is sure to complicate a partnership already strained by miscommunications and missteps. Since the government shored up the embattled bank with fresh capital over the past few months, it has issued some broad directives: ordering Citigroup to sell assets to raise money and curtail risky investments, urging a reshuffle of its board, and warning that if it needs more taxpayer money, management may be booted.

But even as the government has ensured Citigroup's survival for now, bank executives say they have been left to read tea leaves about how to implement federal directives.

U.S. officials say Citigroup's problems are wide-ranging, presenting issues for various governmental agencies -- all of which are also engaged in handling problems involving other banks and the economy. Some officials say they have given Citigroup executives broad outlines of what they'd like the company to do. They say thus far it's not been the government's position to give Citigroup a specific playbook about how to put directives in place. The current talks for federal assistance, however, could result in more direct orders on how Citigroup should proceed.

Regarding the government's relationship with Citigroup, a company spokeswoman said in a statement: "We maintain constant and open communication with all of our regulators."

In recent weeks, Citigroup executives have reached out to various government officials for guidance -- with little to show for their effort. Last week, Mr. Pandit met with Lawrence Summers, the government's chief economic adviser, in the White House's West Wing. Mr. Summers made clear that he wouldn't discuss Citigroup specifically, and Mr. Pandit emerged from the meeting with no better idea of where the Obama administration stands in managing ties with the big bank.

Amid the anxiety, Edward Kelly, a senior investment banker and one of Mr. Pandit's closest confidants, used his personal misfortune to ease tension within Citigroup. After a trying visit to Washington to brief regulators, Mr. Kelly returned to his Baltimore home tired -- and soon woke up to a screeching smoke alarm. Finding flames in his home office and working to halt the fire from spreading, Mr. Kelly burned his right hand and arm so badly that doctors kept him home for several days to prevent infection.

In a flurry of phone calls while he was home recuperating, Mr. Kelly joked to colleagues that he was putting out fires at both his home and his company.

Spotty Communications

Communications from government officials, meanwhile, have been spotty. Friday afternoon, after the bank's shares had closed the week at an 18-year low of $1.95, top executives reached out to the Office of the Comptroller of the Currency and the New York Fed. They wanted to discuss Citigroup's proposal to substantially enlarge the government's ownership stake. The conversations were constructive, but they couldn't progress much until they heard from Treasury, the government arm that had invested in Citigroup's preferred stock and therefore would need to bless converting that stake into common shares.

Through the weekend, Citigroup didn't hear from Treasury officials. Then on Sunday evening, Mr. Pandit's phone rang. It was Treasury Secretary Timothy Geithner, calling with a message: "I think we just need to do something." Mr. Geithner was short on specifics, but said he was ready to entertain Citigroup's idea of converting a big chunk of the government's preferred stock into common shares.

The government's ongoing pressure to slim down the company has forced Citigroup executives to consider a range of unwanted options. They agreed in January to spin off the Smith Barney brokerage unit into a joint venture with Morgan Stanley after insisting for years that they wouldn't part with the business. The bank has also split itself into two parts, with the goal of selling additional assets and businesses.

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Citigroup investment banker Edward Kelly

Executives are now wrestling with the possibility of shedding the company's lucrative Banamex consumer-banking unit in Mexico, even as Citigroup officially insists that is unlikely to happen. Following his meeting with Mr. Summers last week, Mr. Pandit flew to Mexico City, trying to calm Banamex employees who were convinced that the U.S. government would force Citigroup to sell the business.

Citigroup's every move is now under the public microscope. In late January, as news was about to break about Citigroup's plans to buy a $42 million corporate jet, Mr. Pandit huddled with Citigroup executives in the firm's Manhattan headquarters. Mr. Pandit suggested the company simply cancel the order to minimize the bad publicity.

Lewis Kaden, a Citigroup vice chairman, resisted, arguing that the company needed to carefully word any public statement about the jet in order to avoid a fee from the plane's manufacturer. An internal debate ensued over how best to handle the matter, and the lack of a resolution transformed it into a politically potent multiday news story.

Federal officials were apoplectic. President Barack Obama branded Citigroup's plans to buy the plane "outrageous." Treasury officials phoned Citigroup executives and pressured them to scrap the order, which they did.

The tongue-lashing didn't stop there. Mr. Pandit received an earful from Rep. Nydia Velazquez (D., N.Y.). At a meeting in her Manhattan office, Rep. Velazquez scolded Mr. Pandit for not canceling the jet order sooner and suggested that he fire the Citigroup public-relations team for "bungling" the situation. Rep. Velazquez couldn't be reached for comment.

Sen. Charles Schumer (D., N.Y.) also met with Mr. Pandit after the plane debacle. "The dynamics are changing," he told Mr. Pandit. "Brace yourself for more accountability and stricter oversight. No more big executive pay, no more frills."

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Bloomberg News

Treasury Secretary Timothy Geithner

The scrutiny has Citigroup executives second-guessing everything, right down to the fresh-baked cookies offered at a recent corporate retreat in Armonk, N.Y. Seated in plush chairs around a three-story stone fireplace, some attendees wondered aloud if the cookies themselves might be portrayed as a frivolous use of taxpayer money.

In the wake of the airplane flap, federal regulators have begun demanding more detailed information from Citigroup about corporate expenses and individual departments' operating budgets. The government is specifically requesting information about expenses for any lavish parties or other corporate events.

The detailed nature of such requests startled some Citigroup executives, who weren't expecting to fork over such granular information. The company has responded by preemptively canceling several events, including a private-investor conference in Miami slated for April, where hotel rooms for hundreds of people were already reserved. A few groups of Citigroup bankers had planned to take top clients on ski trips in the Rocky Mountains; those plans were shelved. At the Inter-American Development Bank's annual conference, scheduled for March in Colombia, Citigroup won't be hosting its normal after-hours parties.

Citigroup officials are learning the hard way to play politics. Anticipating the political storm he would incite by flying to the nation's capital by private plane, Mr. Pandit now hops on commercial shuttle flights for the frequent trips to Washington. Other executives travel by Amtrak train.

Amid pressure to shake up its board, Citigroup initially suggested it would begin making director changes at the April shareholder meeting. The Fed rejected that, pushing lead director Richard Parsons to act sooner. The Fed has also frowned upon some potential nominees that Citigroup has informally pitched to the agency, saying Washington would prefer "tough-minded independent thinkers."

Though the company has lined up director candidates that it wants the Fed to approve, the candidates haven't agreed to the posts, waiting to see what happens to Citigroup's management, operations and future.

Citigroup's guessing game also extended to congressional hearings held earlier this month. Legislators pounded Mr. Pandit and other bank executives for putting their institutions in jeopardy. As Mr. Pandit prepared for the hearings, some Citigroup executives urged him to make two concessions: apologizing for the corporate-jet fiasco and agreeing not to get paid until Citigroup returns to profitability. Others argued that such conciliatory gestures would validate unfair criticisms of the company. Mr. Pandit ultimately made both concessions at the hearing.

Thawing Markets

Meantime, Citigroup has to stop the financial bleeding. Mr. Pandit last month told senior executives that the first quarter is essentially do-or-die: Citigroup needs to turn a profit to persuade the government and investors that it's viable.

Last week, Citigroup officials privately told regulators it had a profitable January. Credit and stock markets thawed that month, benefiting banks across the industry. "We've got to prove that our core business can make money," Mr. Pandit recently told top aides.

With the economy in a tailspin, some executives privately voiced skepticism that Mr. Pandit's goal of a profitable first quarter would be attainable. The Fed recently barred Citigroup from making acquisitions and reinforced restrictions on the bank's use of capital.

In a recent meeting with investment bankers, Citigroup's investment-banking chief, John Havens, was pushing his deputies to further streamline operations in order to reduce costs. One executive asked whether the changes needed to be made quickly. The question "is typical Citi," Mr. Havens replied, suggesting that decisions at the company take too long, according to a person at the meeting. "That's why Geithner is so intolerant with us these days," Mr. Havens told the bankers.

Now, gallows humor is setting in. This week, some employees noted that they always thought that working for Citigroup -- with its unwieldy bureaucracy and clashing fiefdoms -- was like working for the government anyway.

Execs grabbed big bucks just before bailout

Guess who? What a bunch of idiots.

In all, Merrill doled out $3.6 billion in bonuses just days before Bank of America finalized its deal to buy the collapsing firm - with the help of $45 billion in taxpayer money.

Greed doesn't cover it. Arrogance.

Cuomo's investigators have been particularly interested in Merrill's rush to pay the perks in December, a month before the usual January bonus timetable.

This is more than arrogant; it borders on the illegal.

One beneficiary was Peter Kraus, a Thain hire who started at Merrill in mid-September and quit Dec. 18, the day Bank of America took over.

He was at the firm for 3 months?

He walked away with a $24.9 million bonus for those three months of work, which figures to about $249,000 a day. The day he quit, his wife closed on a $36 million luxury Park Ave. co-op, records show.

Yup, three months; it was in his contract.
Cuomo reveals 4 top Merrill Lynch execs grabbed big bucks just before government-financed takeover

by Greg B. Smith - Daily News - Wednesday, February 11th 2009, 4:00 AM

Four of the top executives at Merrill Lynch pocketed $121 million in bonuses just before taxpayers helped finance a takeover of the failing firm, the Daily News has learned.

The flush foursome each pocketed payments ranging from $18 million to $39 million, investigators from the state attorney general's office found.

Attorney General Andrew Cuomo for the past month has been examining the highly suspicious timing of the last-minute Merrill handouts.

In all, Merrill doled out $3.6 billion in bonuses just days before Bank of America finalized its deal to buy the collapsing firm - with the help of $45 billion in taxpayer money.

Cuomo presented his initial findings Tuesday to Rep. Barney Frank (D-Mass.), whose House Financial Services Committee holds hearings Wednesday in Washington on how banks are spending bailout funds.

"One disturbing question that must be answered is whether Merrill Lynch and Bank of America timed the bonuses in such a way as to force taxpayers to pay for them through the deal funding," Cuomo wrote to Frank.

Cuomo's investigators have been particularly interested in Merrill's rush to pay the perks in December, a month before the usual January bonus timetable.

Cuomo called the decision to accelerate the bonuses "a surprising fit of corporate irresponsibility" that "richly rewarded their failed executives."

Cuomo has subpoenaed former Merrill Chief Executive Officer John Thain and Bank of America's chief administrative officer, Steele Alphin, about the bonuses.

When Cuomo first asked Merrill about its bonus plans back in October, Merrill claimed it hadn't finalized the total size of its bonus pool.

Soon after, it was revealed that Thain was angling for a $40 million bonus. When that embarrassing fact went public, Thain backed off.

Four of his top deputies faced no such change of fortune, however, pocketing a total of $121 million as Merrill evaporated.

One beneficiary was Peter Kraus, a Thain hire who started at Merrill in mid-September and quit Dec. 18, the day Bank of America took over.

He walked away with a $24.9 million bonus for those three months of work, which figures to about $249,000 a day. The day he quit, his wife closed on a $36 million luxury Park Ave. co-op, records show.

Kraus declined to answer questions, although a source familiar with the matter said the amount was guaranteed in his Merrill contract.

Cuomo's investigators want to know why Merrill thought such a guarantee was appropriate given the firm's collapse - and why Merrill didn't try to void it.

The bonuses were handed out just before Merrill announced a record $15 billion loss for the fourth quarter,which brought the year's total losses to nearly $27 billion.

How the firm will try to justify handing out bonuses with such a lousy record remains to be seen.

Bank of America spokesman Scott Silvestri said Merrill Lynch was an independent company when Merrill's compensation committee approved the bonuses.

Silvestri added that many of the Merrill bonuses were contractually guaranteed.

Bank of America's top eight executives took no incentive compensation for 2008. The next tier saw their bonuses cut 80%.

Executive bonuses have become a flash point for resentment as the economy continues to stumble and taxpayers find themselves footing the bill for Wall Street's failures.

Two weeks ago, President Obama called the $18 billion in bonuses Wall Street had just awarded itself "shameful."

A Lonely Lament From a Whistle-Blower

For Harry Markopolos, the Madoff fallout has brought on sleeping problems and haunting thoughts over the apparent suicide of a French money manager.

Harry Markopolos, the Boston-based investor-turned-investigator who for years warned regulators that Bernard Madoff was running a huge Ponzi scheme, has received pitches to appear on television shows, make movies and write books elaborating on his experience.

Later this month, he is scheduled to appear before Congress to present recommendations to improve the Securities and Exchange Commission.

But rather than enjoy a sense of vindication, Mr. Markopolos says he is miserable. He has trouble sleeping and is haunted by the apparent suicide of Thierry Magon de La Villehuchet, a French money manager found dead shortly after Mr. Madoff's Dec. 11 arrest on fraud allegations.

Magon de la Villehuchet’s Suicide Leaves Questions

An interesting quote:

“He had a true concept of capitalism,” Bertrand de la Villehuchet, 74, said of his brother. “He felt responsible and he felt guilty. Today, in the financial world, there is no responsibility; no one wants to shoulder the blame.”

How very true. Everyone seems unwilling to accept responsibility, let alone blame, and many still want bonuses. The top dog on this line is Richard Fuld of Lehman Brothers, who put his firm out on a highly leveraged financial limb of risk, saw it collapse, saw other collapsing firms rescued, and could only wonder why Lehman had been allowed to fail.

Mr. de la Villehuchet, a French aristocrat and professional investor who lived in the New York suburbs, had put at least $1.4 billion of his and his clients’ money with Mr. Madoff. He had lost his entire savings. He was overwhelmed and depressed, according to people who had spoken to him. Worse, he felt personally responsible for the money his investors had lost, his brother Bertrand said in a phone interview in Paris this week.

It is not easy to feel bad for an aristocrat, automatically or on reflection, but on further reflection, it is possible.

Suicide is the most intimate of acts, and no one can know exactly what Mr. de la Villehuchet was thinking as he decided to take his own life. But the fraud weighed heavily on him. “It’s a complete nightmare,” he told a longtime client in Paris, less than a day before he died, according to the client.

Thinking of how he must have felt, knowing all the money was gone, is literally impressive: I can imagine the heart ache, the horror, the weight of responsibility.

In a note to his brother written shortly before his death, Mr. de la Villehuchet said that he needed to be held accountable for the losses, his brother said. “If you ruin your friends, your clients, you have to face the consequences,” Bertrand said, explaining what his brother believed.

That is having a sense of honor and of responsibility.

Mr. de la Villehuchet’s attitude appears to be rare. So far, the leading players in Mr. Madoff’s case have maintained a stony silence, studiously avoiding apologies or statements of responsibility.

It is rare. No one accepts any responsibility for the debacle. Hell, even Bernanke is busy fixing the mess he took a pert in creating, or at least in not dealing with much earlier.

Mr. Madoff’s sons have said nothing about how they could have worked at their father’s firm for decades without noticing that the money he supposedly managed did not exist. The accountants and regulators who were supposed to protect investors have not explained their failure to do so. And the hedge funds that invested tens of billions of dollars with Mr. Madoff despite obvious red flags have said the fraud was his fault, not theirs.

The hedge funds can wallow in their own mess. Regulators should be embarrassed and fired. The sons should be punished in some way.

A "feeder fund" advised by Villehuche's firm, Access International Advisors, called Leveraged Options Arbitrage Fund, had $500 million in assets ... and charged investors a management fee of 1 percent of assets annually and 15 percent of any profits the fund generated. Fairly typical, though I've read of funds charging 20% of profits. So this one made $5 million to start with, annually.

A second feeder fund, called LuxAlpha Sicav, had $1.4 billion in assets. It charged a 5 percent upfront fee, a management fee of 0.8 percent annually and a 16 percent performance fee. It is not clear if, or how, the two funds were related.

5% of $1.4 billion is $70 million, charged upfront; 0.8% is $11.22 million, annually.

At the end, it all ended tragically, and sadly. Villehuche is dead, by choice, feeling disgraced; Madoff is alive, the cad.