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Guest post: Former Countrywide head Mozilo is charged by the SEC

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Submitted by Edward Harrison of the site Credit Writedowns

.It’s about time. The SEC has finally charged a high level executive in the banking industry in connection with activities that led to the largest bubble in U.S. history. The accused, as expected, is Angelo Mozilo, otherwise known as “The Man with the Tan.” You will recall that I have been expecting this for some time and wondered why it was taking so long for this case to come to fruition in my post, “Where are the perp walks?” Let’s take a walk down memory lane with Angelo, shall we?

Then it was all quiet on the western front. Nothing for months regarding Mozilo. So, I’ll ask the question again from March:

Why has the Obama Administration not shown prosecutorial zeal with financial executives for alleged wrongdoings? I would have anticipated that Eric Holder at the Justice Department would have signalling to the American public that the new administration was breaking with the old – that Barack Obama wanted to at a minimum investigate wrong-doing.

Is this a case of the SEC being more careful in compiling its case, a clear sign of regulatory capture, or something more sinister? Please, chime in.

UPDATE: Here is the official press release of the charges of fraud:

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

17 comments

  1. Cat

    I'll vote for "careful in compiling its case": He's the first, and there are bigger slimeballs to follow. If they screwed up on a technicality it would look Really Bad ™ and lower expectations for any different outcome on any of the others.

    Of course he could still skate. If they can hold that off until end of 2009 then they can count on the electorate being too tied up with simple survival to much mind.

    cougar

  2. jerrydenim

    I've spent an awful lot of time contemplating the same question.

    Yes I think that the absence of prosecution and investigation into the various financial boondoggles and schemes of the past year are definitely the signs of a very corrupt and rigged system. Classic crony-capitalism. But I also think there was another motive. Any real prosecution or serious investigation into the various shady practices of Wall Street would have lifted the veil to the American public and confirmed their worst fears. Wall Street would have been exposed for the den of vipers that it is, Americans would have realized that there is no way for a small honest investor to win in this country and every worker in the USA with a 401k or otherwise would have pulled every single dime out of the market, withdrawn all of their money from their savings account and parked it under a mattress. The American economy of course would have completely imploded and we would be living under martial law or some other terrible situation. Now whether or not that would have been the real reaction of the American public upon finding out their entire economy was a sham and the game had been fixed I don't know, but you can bet Larry Summers and Geithner were singing this song and warning Obama about letting his AG do anything rash.

  3. TomOfTheNorth

    How about Ken Lewis for Material Non-disclosure & Conspiracy to Defraud on the Merrill transaction? Henry Paulsen & Ben Bernanke as unindicted co-conspirators on the Fraud…..

    The Mozilo prosecution is selective window dressing if they don't go after all the rest.

  4. Edward Harrison

    Interesting answers. jerrydenim, I like your answer because it has a ring of truth i.e. that Summers and Geithner believed the financial system was too fragile to start real prosecutions earlier.

    I am withholding judgement until more time passes. We've only had 6 months and it isn't clear yet why the Obama people are doing a lot of the things they are doing. Rather than assume nefarious reasons, I will choose to press for the outcomes I think are desirable and assume they had reasons to differ when they act otherwise.

    If we think back to the Pecora hearings, he was appointed under Hoover:

    http://en.wikipedia.org/wiki/Ferdinand_Pecora

    So, the parallel for more being done at this juncture in the political process is there. However, the Depression had been longer and deeper when the Pecora hearings came on the scene.

    So, perhaps it is simply a matter of time.

  5. stark

    Keep in mind that this is nothing but a civil suit. He can be fined, he can be enjoined from further involvement in financial services companies, but he can't be sent to jail. No handcuffs or jail jumpsuits are in his future unless there is still some criminal case being developed somewhere.

  6. stark

    I would also observe that these kinds of cases, civil or criminal, are fiendishly complicated. Haste makes waste in the legal system. A defective lawsuit can be thrown out of court quickly. That can end the case for good, or at best, force the SEC to go back to square one and repair and refile the paperwork. A lot of legal research had to be done before this case could be filed.

  7. DownSouth

    When the oil scandals (Teapot Dome and Elk Hills) were first spread across the front pages of the newspapers, early in 1924, there was a wave of excitement sufficient to force the resignations of Denby and Daugherty and to bring about the appointment by the new President, Calvin Coolidge, of special Government counsel to deal with the oil cases. But the harshest condemnation on the part of the press and the public was reserved, not for those who had defrauded the government, but for those who insisted on bringing the facts to light. Senator Walsh, who led the investigation of the oil scandals, and Senator Wheeler, who investigated the Department of justice, were called by the New York Tribune "the Montana scandalmongers." The New York Evening Post called them mud-gunners." The New York Times, despite its Democratic leanings, called them "assassins of character." In these and other newspapers throughout the country one read of the "Democratic lynching-bee" and "poison-tongued partisanship, pure malice, and twittering hysteria," and the inquiries were called "in plain words, contemptible and disgusting."

    Newspaper-readers echoed these amiable sentiments… The fact was that any relentless investigation of the scandals threatened to disturb, if only slightly, the status quo, and disturbance of the status quo was the last thing that the dominant business class or the country at large wanted.

    They had voted for normalcy and they still believed in it. The most that they required of the United States Government was that it should keep its hands off business (except to give it a lift now and then through the imposition of favorable tariffs and otherwise) and be otherwise unobtrusive. They did not look for bold and far-seeing statesmanship at Washington; their idea of statesmanship on the part of the President was that he should let things alone, give industry and trade a chance to garner fat profits, and not "rock the boat."
    ~
    –Frederick Lewis Allen, Only Yesterday

    http://xroads.virginia.edu/~HYPER/ALLEN/ch6.html

  8. stark

    In the civil suit, the government seeks unspecified fines and penalties, disgorgement of improperly obtained profits, and an injunction barring Mozilo and his two co-defendants from serving as officer or director of a publicly-traded company. That's it.

  9. skippy

    I'm with jerry and Ed H. The shot that stampeded the herd was not a desirable out come and until around 80% (irrefutable mandate) of the population bays for blood, will it be possible to have pecora II.

    The amount of trash all party's have on each other scares me more than tactical-nuke warfare. If the information came out all at once it would be like shoving a hippo down a pythons gob, death ensuing for both.

  10. Paul

    If that's all they have on him, the SEC doesn't have much of a case. I'm no fan of the sleazy Tangelo, but lets face it, he did what any CEO is supposed to do. He was the company chearleader and I'm sure the corporate disclosures were vague enough. His selling was fully disclosed and set up to automatically sell shares every month. He didn't control the timing.

    Now, what about Lehman, Bear Stearns, AIG, Citi, Wachovia, the list goes on and on. Were they taking silly undisclosed risks? And a $90 billion dollar hole in GM's balance sheet? didn't the execs get in front of Congress and say things were tough but with $10 billion they'd be just peachy? Why didn't the auditors note a $90 billion gap between assets and liabilities?

    Can you see the CEO of Pepsi saying, yeah they just mix water, sugar and some CO2 gas, put it in a bottle and people pay silly amounts for it. And they can't even do that as well as Coke. Hell, no, Pepsi's CEO is the company chearleader – they make the best fizzy sugary drinks around.

    I hope the SEC has something a lot more damning on the Tan One than what they've disclosed.

  11. dd

    This will be a difficult case. It is not an underlying fraud case ie Mozilo engaged in fraudulent practices and hid the fraud; but rather it's a failure to disclose business practices that resulted in less stringent underwriting guidelines and increasing credit risk. For example, there is no allegation of phantom loans or even predatory lending or the state AG settlement (Of course that raises the issues of Greenspan's blind eye to predatory lending:http://online.wsj.com/article/SB118134111823129555.html?mod=todays_us_money_and_investing).
    The problem: the less than stellar underwriting practices on non-GSE are detailed in other SEC filings ie the prospectuses for the specific securitizations. So the underwriting practices are public; but not detailed in the periodic filings.
    Even the hedgie CWALT purchasers like Greenwich have not sued CW for fraud; but pursued an end run aimed at the AG settlements.
    Then too if hedge funds alleged fraud that would raise issues about their due diligence on behalf of investors.
    The problem is in a vast consortium everyone is inter-webbed and so will remain silent lest their own lack of due diligence is exposed.
    I wish the SEC luck and the sheer audacity of Mozilo's sales will probably carry the day; but the complaint is no Enron in terms of phantom trading floors and nonexistent deals.

  12. Carlosjii

    More prosecutions of bank execs? Where do you think the “campaign” (champagne) $$$ comes from. DC is totally pay-to-play. The O team as architects of change?????

    Rahm Emanuel took $340,000 out of FRE in the year before the election. Obama will end up as the Hoover of our generation.

  13. jerrydenim

    Ed, it is very kind of you to give the Obama administration the benefit of the doubt, I attempt to do the same when it appears reasonable. If Obama or his econ team truly believed that earnest investigation and prosecution would have undermined public confidence to point it endangered the entire system then "benevolent neglect" may have truly been benevolent not nefarious. If that was the situation then perhaps we will never know if the right call was made. On the other hand a thorough investigation and aggressive prosecution of miscreants could have restored faith in the American economy and could have helped buoy the dollar, T-Bill auctions, and encouraged foreign investment. Such a pursuit of justice could have also lead to meaningful reform which could prevent an even worse meltdown in just a few years. Time will likely tell.

    Skippy, I agree that a Pecora II seems pretty far fetched based on what I've seen at this point. I don't think either party has much interest in biting the hand of their pay-masters. Your analogy between the shared trove of extortion ready information the two parties have on each other and nuclear warfare is an extremely apt metaphor. To take the metaphor further, I would say you never need to worry about either party dropping the bomb on the other, because the mutual dirt sets up a cold war MAD situation between the two with respect to any major issue confronting the voting public. If and when there ever is a Pecora II you can bet it will be a repeat of the 9/11 commission. A carefully picked, perfectly balanced committee of career partisans with not so visible but deep ties to both their respective parties and the financial industry. These men and women will be perfectly unified and singular in their purpose: "You cover my boss's ass, I cover yours. Nobody looks too bad, everyone gets out alive. We'll dig just deep enough to look like we're doing something but we'll leave out all of the really rotten stuff, then we'll create some new worthless federal agency or program to make it look like we've accomplished something. Case closed move along, nothing to see here."

    Bipartisan ass covering at its finest. Wherever mutual self preservation is concerned Democrats and Republicans can be very good at playing nice together.

  14. Eric

    Preparing a careful case is simply not a sign of regulatory "capture". This statement reminds me of a recent Nakedcapitalism.com post that thoroughly confused civil versus criminal procedure. The fact that the SEC did anything at all would indicate, to me at least, that the agency may be turning a new leaf. The Madoff letter to the SEC is the best circumstantial evidence that one could present to prove that the SEC — at that point in time — was either captured or simply hopelessly incompetent and crippled, most likely by design.

  15. JEFF

    I'm betting that this case is settled for a few million without admitting any wrong doing on the Tan Man's part. What really sucks is the taxpayer will be paying for Tanzillo's defense courtesy of BAC receipt of billions of dollars of bailout money!

  16. Edward Harrison

    Eric,

    I think you misunderstood the question. I outlined three possibilities. 1. Was the Obama team being careful in preparing it's case OR 2. Was it captured and didn't feel prosecution was necessary OR 3. Some third more nefarious alternative

    Certainly, there might be other benign alternatives as well, but you should not think I was implying they were captured simply because they were being careful in preparing a case.

    Stark, the fact that this is civil and not criminal is interesting. One could legitimately claim that they are bringing a weak case to court to be seen as having prosecutorial zeal and that, in truth, there are no smoking guns as in Enron.

  17. stark

    In a civil case, the government can prevail with "preponderance of the evidence" rather than the tougher "beyond a reasonable doubt." I agree with the commenter who said that a settlement of this case is likely. Mozilo will shell out a big, headline-worthy amount in fine and disgorgement, he will accept an injunction that in effect forces him to retire in the prime of life–he's only 70– :-)
    And he will not admit wrongdoing, and he will die a lot richer than me.

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