Sunday, September 30, 2007

It's not the sales. It's the buyback. (More on Countrywide) 
CBS, the pride of the American news media, breathlessly reports:

REPORT: Countrywide CEO Cashed Out.

The CBS report is merely following up on a much more detailed LA Times report.

Both fail utterly to get to the root of the story.

The problem isn't that Mozilo cashed out a lot of stock options. That's entirely legitimate, and no one is alleging that he failed to disclose his trading in accordance with company policy and the law.

This is the most widely predicted and predictable bubble in a generation. Mozilo would be a fool not to have lightened up (though he still should have maintained a significant long position out of principle. My issue is that as far as I can tell, he has no long position.)

The real problem is that even as Mozilo was quietly unloading his own shares, Countrywide was loading up the company with debt to buy by back millions of shares at prices management obviously thought were inflated (around 40 bucks).

Actually, that buyback program was initiated almost exactly at the same time that Mozilo began selling.

Oh, and you also read it here on Countercolumn.

I am not long Countrywide, except via Weitz Value.

It's tempting. It trades at 5x official earnings (I mentally adjust that to more like 8 to 9 times "real world" earnings, and trades at 20 to 30 percent off book value. It is less than 10% into subprimes. It is about 40% into adjustables, but those adjustables are spread across the United States, and not concentrated in California (in contrast to someone like Wells, which is a western franchise, and even Washington Mutual, which is overexposed to California, which surprised me to learn.)

Countrywide also recently executed a large buyback of shares around the 40 dollar mark last year. Shares are now trading at around 18.

It's very tempting - with a nice dividend in the meantime to pay me for waiting for a recovery.

But I look at their CEO, and he is selling shares as fast as his options vest. He doesn't seem to be retaining any of them personally, and therefore I distrust him as an owner-manager.

I know. Please. Try not to gush.

What's more, it is this seeming mismatch between the CEO's own trading actions and the COMPANY BUYBACK ITSELF that will expose Mozilo and the directors to legal liability. The buyback is a key option, because it's the buyback, not the insider sales, that arguably represent a violation of fiduciary duty to shareholders.

Both the LA Times and CBS completely miss the story. But it was all in the insider trading filings and the 10K filing with the SEC, clear as day.

It doesn't take a lot of visual acuity to perceive a lightning bolt. Mozilo's stock sales and cashless option exercizes have been a matter of public record since the day they began.

Further, Countrywide's been a staple of financial news for months.

The fact that the LA Times and CBS are just now waking up to the fact that the CEO has been selling like crazy - and STILL somehow blows the real story - ought to be a screaming hint about why you shouldn't trust the drive-by-media for business news.

Splash, out


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