COUNTERCOLUMN: All Your Bias Are Belong to Us

I get bragging rights: I called it precisely.

Here's what I wrote more than a year and a half ago:

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.

Here's the headline today:

SEC charges ex-Countrywide CEO Mozilo with fraud and insider trading

From the story:

Mr. Mozilo set up four executive stock sales plans for himself in the last three months of 2006, all the while aware of the company’s fate and that of its loan portfolio, the SEC charged.

Between November of that year and August 2007, he exercised more than 5.1 million stock options, raking in about $140 million, bailing himself out while Countrywide and its investors crashed and burned, according to the charges.

Aside from the fraud charges, the SEC also wants the three men to pay up their ill-gotten gains, plus financial penalties, and for the trio to be barred from becoming officers or directors at publicly held companies.

Richard H. Moore, former state treasurer of North Carolina, wrote a letter in 2007 to then-SEC chairman Christopher Cox, asking him to investigate stock sales that Mr. Mozilo had made.

Ben Graham, you magnificent bastard, I read your book!!!

Splash, out

Jason

Labels: Countrywide, finance, investing, mortgages, personal