WEBVTT 00:00:00.000 --> 00:00:02.899 All right. Welcome back to the Deep Dive. So 00:00:02.899 --> 00:00:05.839 today, we're opening up a file that, honestly, 00:00:06.040 --> 00:00:08.300 I think a lot of us think we know the story of. 00:00:08.439 --> 00:00:10.919 Oh, it's so much deeper. I mean, this is really 00:00:10.919 --> 00:00:13.640 the definitive story of the American economy 00:00:13.640 --> 00:00:17.420 for, what, a 30 -year span? It really is. It 00:00:17.420 --> 00:00:19.940 has everything. You've got massive ambition. 00:00:20.120 --> 00:00:23.460 You've got this incredible growth story. But 00:00:23.460 --> 00:00:26.600 then systemic corruption and a collapse so huge, 00:00:26.679 --> 00:00:29.210 it... It almost took the entire world down with 00:00:29.210 --> 00:00:31.050 it. It's the whole package. We are, of course, 00:00:31.070 --> 00:00:33.590 talking about countrywide financial. And to kick 00:00:33.590 --> 00:00:35.049 things off, I want to just throw a number at 00:00:35.049 --> 00:00:37.390 you. I found this researching the episode and 00:00:37.390 --> 00:00:39.390 I had to like read it three times because I thought 00:00:39.390 --> 00:00:40.950 it was a typo. I think I know which one you're 00:00:40.950 --> 00:00:43.509 talking about. And it is it is staggering every 00:00:43.509 --> 00:00:47.649 single time. OK, so if you invested in countrywide 00:00:47.649 --> 00:00:50.710 stock in 1982 and you just held on to it until 00:00:50.710 --> 00:00:53.759 2003. What do you think that return was? It sounds 00:00:53.759 --> 00:00:55.439 like something from, you know, the dot -com bubble 00:00:55.439 --> 00:00:58.219 or the crypto craze. But this was a mortgage 00:00:58.219 --> 00:01:01.600 company, a boring mortgage company. 23 ,000%. 00:01:01.600 --> 00:01:05.620 There it is. 23 ,000%. I mean, that beat Walmart 00:01:05.620 --> 00:01:08.459 during its rocket ship growth phase. It beat 00:01:08.459 --> 00:01:10.760 Warren Buffett's Berkshire Hathaway. Fortune 00:01:10.760 --> 00:01:14.159 magazine literally called it the 23 ,000 % stock. 00:01:14.620 --> 00:01:16.939 It was an absolute machine for two decades. It 00:01:16.939 --> 00:01:18.640 wasn't just, you know, a successful company. 00:01:18.659 --> 00:01:20.920 It was a money printing operation. And you have 00:01:20.920 --> 00:01:23.379 to understand that context, that high point to 00:01:23.379 --> 00:01:26.439 really get how catastrophic the fall was. Right. 00:01:26.500 --> 00:01:30.019 Because by 2006, at their peak, Countrywide wasn't 00:01:30.019 --> 00:01:32.439 just a lender. They were the lender. They were 00:01:32.439 --> 00:01:34.900 financing one out of every five mortgages in 00:01:34.900 --> 00:01:36.819 the United States. Stop and think about that. 00:01:36.920 --> 00:01:40.079 One in five. You drive down any suburban street 00:01:40.079 --> 00:01:43.920 in America in, say, 2006 and every. The fifth 00:01:43.920 --> 00:01:47.200 house you pass was financed by these guys, by 00:01:47.200 --> 00:01:49.659 Angelo Mozilla. Exactly. The value of the loans 00:01:49.659 --> 00:01:51.019 on their books was something like three and a 00:01:51.019 --> 00:01:53.540 half percent of the entire U .S. GDP. That's 00:01:53.540 --> 00:01:56.680 insane. No single lender had ever, ever had that 00:01:56.680 --> 00:01:58.280 kind of power over the American housing market. 00:01:58.519 --> 00:02:00.780 And yet today, I mean, the name Countrywide, 00:02:00.920 --> 00:02:02.900 there's basically a swear word in finance. It's 00:02:02.900 --> 00:02:05.599 just synonymous with toxic, with fraud. It went 00:02:05.599 --> 00:02:08.699 from this Wall Street darling to, you know, facing 00:02:08.699 --> 00:02:10.819 bankruptcy rumors almost overnight. And then, 00:02:10.860 --> 00:02:12.580 of course, it was swallowed by Bank of America. 00:02:13.800 --> 00:02:16.539 But we're going to get to the deal, often called 00:02:16.539 --> 00:02:19.199 the single worst acquisition in banking history. 00:02:19.479 --> 00:02:21.340 It's definitely in the running. So that's our 00:02:21.340 --> 00:02:24.080 mission today. We want to bridge that gap. How 00:02:24.080 --> 00:02:27.300 does a company go from a 23 ,000 percent return 00:02:27.300 --> 00:02:30.960 to being the absolute face of the financial crisis? 00:02:31.439 --> 00:02:33.539 We're going to unpack the business model, which 00:02:33.539 --> 00:02:35.900 is way more complex than just lending money. 00:02:36.000 --> 00:02:37.840 Right. We're going to get into the scandals, 00:02:37.840 --> 00:02:42.039 the infamous friends of Angelo lists and the 00:02:42.039 --> 00:02:45.979 just. massive, massive financial hangover that 00:02:45.979 --> 00:02:48.360 Bank of America inherited. So let's rewind. Let's 00:02:48.360 --> 00:02:50.300 go back to the beginning. Where did this monster 00:02:50.300 --> 00:02:52.979 come from? It wasn't born a giant. Not at all. 00:02:53.000 --> 00:02:56.439 It started actually very humbly in 1969, founded 00:02:56.439 --> 00:02:59.259 by two guys, David Loeb and the man himself, 00:02:59.340 --> 00:03:01.639 Angelo Mozilo. Angelo Mozilo. He's the main character 00:03:01.639 --> 00:03:03.939 in this whole tragedy. Even his name sounds like 00:03:03.939 --> 00:03:05.699 he's out of Scorsese film. You see the pictures, 00:03:05.840 --> 00:03:08.840 the permattan, the flashy suits. He was a character, 00:03:08.960 --> 00:03:11.419 a larger than life, very aggressive, very, very 00:03:11.419 --> 00:03:14.020 ambitious guy. But in the beginning, Countrywide 00:03:14.020 --> 00:03:18.719 was, it was not a rocket ship. Their IPO, their 00:03:18.719 --> 00:03:21.439 initial public offering, was actually a flop. 00:03:21.870 --> 00:03:25.189 Really? Yeah. It was described as less than successful. 00:03:25.370 --> 00:03:28.389 The stock traded over the counter for pennies, 00:03:28.389 --> 00:03:30.409 you know, less than a dollar a share. It was 00:03:30.409 --> 00:03:32.189 a penny stock, basically. Essentially, yeah. 00:03:32.349 --> 00:03:34.710 It took them until the mid 80s to really get 00:03:34.710 --> 00:03:36.710 their footing and get listed on the New York 00:03:36.710 --> 00:03:38.870 Stock Exchange. But once they hit their stride, 00:03:38.949 --> 00:03:42.969 they just perfectly rode this huge wave of baby 00:03:42.969 --> 00:03:45.169 boomers buying houses and interest rates going 00:03:45.169 --> 00:03:47.490 down for 20 years. And just to set the stage 00:03:47.490 --> 00:03:49.069 for everyone listening, because corporate names 00:03:49.069 --> 00:03:50.969 change and brands are designed to make us forget. 00:03:51.150 --> 00:03:53.810 But when you see Bank of America home loans today, 00:03:53.969 --> 00:03:56.250 that is countrywide. That's the show. Bank of 00:03:56.250 --> 00:03:58.090 America bought the chassis, right? They painted 00:03:58.090 --> 00:04:00.789 it red, slapped their logo on it. But the engine, 00:04:00.949 --> 00:04:03.830 the infrastructure, the DNA of that operation, 00:04:04.009 --> 00:04:07.009 that was the machine that Angelo built. Precisely. 00:04:07.270 --> 00:04:10.479 And that machine was something special. I think, 00:04:10.479 --> 00:04:12.500 you know, a lot of people have this misconception 00:04:12.500 --> 00:04:16.399 that a mortgage lender is like the bank for Mary 00:04:16.399 --> 00:04:18.699 Poppins. Right. You put your tuppence in an account. 00:04:18.819 --> 00:04:20.839 Yeah. And they lend that tuppence to your neighbor 00:04:20.839 --> 00:04:22.680 to buy a house and they collect the interest. 00:04:23.000 --> 00:04:24.839 Simple. They hold the loan. That's portfolio 00:04:24.839 --> 00:04:26.800 lending. Right. They keep the loan on their own 00:04:26.800 --> 00:04:30.019 books. Exactly. But that is not what Countrywide 00:04:30.019 --> 00:04:33.259 was at all. They were built on a totally different 00:04:33.259 --> 00:04:36.220 model called originate to distribute. They were 00:04:36.220 --> 00:04:39.040 a factory. Their job was to originate the loan. 00:04:39.399 --> 00:04:42.339 get you to sign the papers, and then almost immediately 00:04:42.339 --> 00:04:44.540 sell that loan on what's called the secondary 00:04:44.540 --> 00:04:47.939 market. All right, secondary market. This is 00:04:47.939 --> 00:04:50.439 the key. This is the engine of the whole story, 00:04:50.620 --> 00:04:53.199 really. It sounds technical, but the concept 00:04:53.199 --> 00:04:56.439 is. It's actually pretty simple. Think of it 00:04:56.439 --> 00:04:58.860 like a conveyor belt. You, the home buyer, come 00:04:58.860 --> 00:05:01.180 to Countrywide. They give you the money. Now 00:05:01.180 --> 00:05:03.740 Countrywide is holding your IOU, your mortgage. 00:05:04.490 --> 00:05:06.730 They don't want to sit on that IOU for 30 years 00:05:06.730 --> 00:05:08.649 and collect your little payments. They want their 00:05:08.649 --> 00:05:11.430 cash back now. Right now. So they can go lend 00:05:11.430 --> 00:05:13.230 it to the next person in line. So what they do 00:05:13.230 --> 00:05:16.990 is they take your IOU, they bundle it with thousands 00:05:16.990 --> 00:05:19.490 of other IOUs. And they create something called 00:05:19.490 --> 00:05:22.990 a mortgage -backed security, an MBS. And then 00:05:22.990 --> 00:05:25.430 they sell that big bundle, that security, to 00:05:25.430 --> 00:05:28.430 big investors. We're talking pension funds, insurance 00:05:28.430 --> 00:05:31.519 companies, foreign governments. Anybody with 00:05:31.519 --> 00:05:34.019 a ton of cash looking for a return. So Countrywide 00:05:34.019 --> 00:05:35.759 is just the middleman. They're just connecting 00:05:35.759 --> 00:05:38.019 Wall Street money to Main Street homebuyers and 00:05:38.019 --> 00:05:40.160 taking a fee for doing it. That's the core of 00:05:40.160 --> 00:05:43.439 it. Yeah. Yeah. But Angelo Maslow was not content 00:05:43.439 --> 00:05:46.240 with just being a middleman. He wanted to capture 00:05:46.240 --> 00:05:49.500 every single dollar related to that transaction. 00:05:49.819 --> 00:05:52.879 And this brings us to their real genius and their 00:05:52.879 --> 00:05:55.870 real downfall. Vertical integration. Vertical 00:05:55.870 --> 00:05:57.730 integration. Okay, business school buzzword. 00:05:57.810 --> 00:06:00.649 Yeah. Usually means like Ford owning a rubber 00:06:00.649 --> 00:06:02.990 plantation for their tires. You own the whole 00:06:02.990 --> 00:06:05.110 supply chain. That's exactly what it was here. 00:06:05.189 --> 00:06:08.009 They wanted to own every single step of you buying 00:06:08.009 --> 00:06:09.589 a house. Let's just walk through a hypothetical. 00:06:09.949 --> 00:06:12.550 It's 2005. You go to Countrywide for a loan. 00:06:12.709 --> 00:06:15.550 They say, great, first thing we need is an appraisal 00:06:15.550 --> 00:06:17.490 on the house to make sure it's worth what you're 00:06:17.490 --> 00:06:20.189 paying. So who do you think they hire to do the 00:06:20.189 --> 00:06:22.449 appraisal? An independent appraiser, I would 00:06:22.449 --> 00:06:24.899 hope. You know, a neutral third party, to keep 00:06:24.899 --> 00:06:27.500 everyone honest. You would hope. But no. They 00:06:27.500 --> 00:06:30.560 hire a company called Landsafe. And Landsafe 00:06:30.560 --> 00:06:33.639 is? A wholly owned subsidiary of Countrywide 00:06:33.639 --> 00:06:36.519 Financial. Wait, wait, wait. So the lender owns 00:06:36.519 --> 00:06:39.399 the appraiser. Isn't that a massive, glaring 00:06:39.399 --> 00:06:42.319 conflict of interest? It's huge. If I'm the lender, 00:06:42.459 --> 00:06:45.540 my whole business depends on making loans. I 00:06:45.540 --> 00:06:47.399 want the appraisal to be high so the deal goes 00:06:47.399 --> 00:06:50.279 through if I control the appraiser. You see the 00:06:50.279 --> 00:06:52.019 problem immediately. The checks and balances 00:06:52.019 --> 00:06:54.959 are just gone. It's a closed loop. If a land 00:06:54.959 --> 00:06:57.199 safe appraiser starts coming in with low ball 00:06:57.199 --> 00:06:59.819 appraisals and killing deals, who do you think 00:06:59.819 --> 00:07:01.800 his boss at Countrywide is going to hear from? 00:07:01.920 --> 00:07:04.000 It's not going to go well for him. Not at all. 00:07:04.019 --> 00:07:06.120 And it didn't stop there. OK, we need a credit 00:07:06.120 --> 00:07:08.500 report. Land safe pulls the credit report. We 00:07:08.500 --> 00:07:11.220 need title insurance. Land safe provides the 00:07:11.220 --> 00:07:13.769 title services. So they're literally paying themselves 00:07:13.769 --> 00:07:16.269 to verify their own deals. It's like a student 00:07:16.269 --> 00:07:19.470 getting to grade their own exam. 100%. And then, 00:07:19.550 --> 00:07:21.670 once the loan is all signed, they say, great, 00:07:21.790 --> 00:07:24.050 now you need homeowners insurance. And guess 00:07:24.050 --> 00:07:26.870 who sells that? A company called Balboa Life 00:07:26.870 --> 00:07:30.009 and Casualty? Let me guess. Also owned by Countrywide. 00:07:30.149 --> 00:07:33.410 You got it. Another subsidiary. They'd sell you 00:07:33.410 --> 00:07:35.850 property insurance, casualty insurance. They'd 00:07:35.850 --> 00:07:38.670 even try to sell you life insurance. Every slice 00:07:38.670 --> 00:07:42.149 of the pie. If a dollar was changing hands related 00:07:42.149 --> 00:07:44.290 to that house, they wanted it to end up in a 00:07:44.290 --> 00:07:46.870 countrywide pocket. It's brilliant from a purely 00:07:46.870 --> 00:07:49.769 cynical business perspective. It's ruthlessly 00:07:49.769 --> 00:07:54.389 efficient. But it also means you are so, so exposed 00:07:54.389 --> 00:07:56.970 if the housing market ever turns. And we haven't 00:07:56.970 --> 00:07:59.129 even gotten to the top of the food chain. The 00:07:59.129 --> 00:08:01.490 final piece of this vertical machine was their 00:08:01.490 --> 00:08:04.350 own capital markets division. OK. Remember we 00:08:04.350 --> 00:08:06.410 said they sell those bundles of loans to Wall 00:08:06.410 --> 00:08:08.189 Street. Well, eventually they just became Wall 00:08:08.189 --> 00:08:10.529 Street. They set up their own broker dealer so 00:08:10.529 --> 00:08:12.990 they could underwrite and trade their own mortgage 00:08:12.990 --> 00:08:16.629 backed securities. Unbelievable. So let's recap 00:08:16.629 --> 00:08:19.620 the flow. They find the borrower. They originate 00:08:19.620 --> 00:08:22.040 the loan. Their own company appraises the house. 00:08:22.120 --> 00:08:24.220 Their other company insures the house. Then they 00:08:24.220 --> 00:08:26.579 bundle the loan into a security. And then their 00:08:26.579 --> 00:08:28.399 other company sells that security to investors. 00:08:28.680 --> 00:08:31.100 It's a completely self -contained, self -eating 00:08:31.100 --> 00:08:34.100 financial ecosystem. And this whole factory, 00:08:34.259 --> 00:08:37.320 this whole machine was incredibly, incredibly 00:08:37.320 --> 00:08:39.940 profitable as long as one simple condition was 00:08:39.940 --> 00:08:43.700 met. Volume. They needed a constant, never -ending 00:08:43.700 --> 00:08:46.799 river of new borrowers walking in the door to 00:08:46.799 --> 00:08:48.779 keep the fees flowing and the machine running. 00:08:48.940 --> 00:08:50.980 And this is where the story starts to get really 00:08:50.980 --> 00:08:56.500 dark. Because by, what, 2004, 2005, the pool 00:08:56.500 --> 00:08:59.940 of good borrowers was starting to dry up. It 00:08:59.940 --> 00:09:01.860 was tapped out. Everybody with a good credit 00:09:01.860 --> 00:09:04.320 score, a stable job, 20 % for a down payment. 00:09:04.419 --> 00:09:06.200 Yeah. They already had a house. They'd already 00:09:06.200 --> 00:09:08.419 refinanced. The low -hanging fruit was gone. 00:09:08.500 --> 00:09:11.039 So if you're Angelo Mozzillo. And your stock 00:09:11.039 --> 00:09:13.799 has delivered 23 ,000 percent. And Wall Street 00:09:13.799 --> 00:09:16.080 expects you to keep growing. But you've run out 00:09:16.080 --> 00:09:18.120 of prime customers. What do you do? You lower 00:09:18.120 --> 00:09:21.200 your standards. You widen the net. And this is 00:09:21.200 --> 00:09:25.179 where Countrywide's super aggressive multi -channel 00:09:25.179 --> 00:09:27.899 strategy came in. I saw this in the notes. They 00:09:27.899 --> 00:09:30.059 broke it down into four different divisions. 00:09:30.399 --> 00:09:32.980 And one of them was called full spectrum lending. 00:09:33.240 --> 00:09:36.039 Right. That name sounds so corporate and clean. 00:09:36.669 --> 00:09:39.330 We serve the full spectrum like a like a happy 00:09:39.330 --> 00:09:41.669 rainbow. It's one of the great corporate euphemisms 00:09:41.669 --> 00:09:44.850 of all time. Full spectrum was their internal 00:09:44.850 --> 00:09:48.070 code for subprime. The source material is very 00:09:48.070 --> 00:09:51.210 clear. This division focused on customers with 00:09:51.210 --> 00:09:54.710 less than prime quality credit. This is where 00:09:54.710 --> 00:09:57.350 they really started pushing the the exotic products. 00:09:57.429 --> 00:09:59.970 Explain what an exotic product is in the mortgage 00:09:59.970 --> 00:10:02.490 world. What made these loans so toxic? We're 00:10:02.490 --> 00:10:04.309 talking about things like option ARAMs, which 00:10:04.309 --> 00:10:06.870 are adjustable rate mortgages or interest -only 00:10:06.870 --> 00:10:10.509 loans. But the worst were the negative amortization 00:10:10.509 --> 00:10:13.149 loans. Negative amortization. Imagine taking 00:10:13.149 --> 00:10:15.169 out a loan where for the first two or three years, 00:10:15.230 --> 00:10:17.549 your monthly payment doesn't even cover the full 00:10:17.549 --> 00:10:20.309 interest that's due. The unpaid interest just 00:10:20.309 --> 00:10:22.629 gets tacked onto your loan balance. Exactly. 00:10:22.750 --> 00:10:24.870 You make your mortgage payment every month, and 00:10:24.870 --> 00:10:26.649 at the end of the year, you actually owe more 00:10:26.649 --> 00:10:28.950 money than when you started. Your debt is going 00:10:28.950 --> 00:10:31.690 up even though you're paying the bank. That seems 00:10:31.690 --> 00:10:34.909 fundamentally broken. It's a time bomb. And it's 00:10:34.909 --> 00:10:37.690 fine maybe if you're a sophisticated real estate 00:10:37.690 --> 00:10:39.429 flipper who's going to be out of the house in 00:10:39.429 --> 00:10:42.549 six months. But it is an absolute catastrophe 00:10:42.549 --> 00:10:45.129 if you're a regular working family who just told, 00:10:45.210 --> 00:10:47.470 don't worry about it. You can just refinance 00:10:47.470 --> 00:10:50.210 in two years when your house is worth more. And. 00:10:50.519 --> 00:10:53.299 Countrywide was pushing these hard. Extremely 00:10:53.299 --> 00:10:56.500 hard. I mean, look at this number. In 2006, 45 00:10:56.500 --> 00:10:59.440 % of all the loans they made were conventional 00:10:59.440 --> 00:11:02.480 non -conforming loans. Okay, non -conforming. 00:11:02.580 --> 00:11:04.980 Translate that for us. Conforming loans are the 00:11:04.980 --> 00:11:07.759 safe ones. They meet the strict standards set 00:11:07.759 --> 00:11:10.059 by the government -sponsored entities Fannie 00:11:10.059 --> 00:11:13.080 Mae and Freddie Mac. Non -conforming means they 00:11:13.080 --> 00:11:15.980 were too big or too risky. Basically, they were 00:11:15.980 --> 00:11:18.299 loans that were too toxic for even the government 00:11:18.299 --> 00:11:21.200 -backed giants to buy. So almost half their business 00:11:21.200 --> 00:11:24.559 in 2006 was stuff that Fannie and Freddie wouldn't 00:11:24.559 --> 00:11:27.740 touch with a 10 -foot pole? Exactly. And because 00:11:27.740 --> 00:11:30.700 Fannie and Freddie wouldn't buy them, Countrywide 00:11:30.700 --> 00:11:34.259 had to rely 100 % on private investors, Wall 00:11:34.259 --> 00:11:36.899 Street banks, hedge funds to buy this risky paper. 00:11:37.039 --> 00:11:39.379 And that's a key point. Because when those private 00:11:39.379 --> 00:11:41.700 investors got nervous and walked away, Countrywide 00:11:41.700 --> 00:11:45.100 had no safety net, no plan B. So we have the 00:11:45.100 --> 00:11:47.879 machine, we have the risky products. But how 00:11:47.879 --> 00:11:49.940 do they get so many people to sign on the dotted 00:11:49.940 --> 00:11:52.960 line for these terrible loans? The research talks 00:11:52.960 --> 00:11:55.419 about a practice called steering. This gets to 00:11:55.419 --> 00:11:57.720 the real ethical rot at the heart of the sales 00:11:57.720 --> 00:12:00.240 culture. Countrywide eventually had to settle 00:12:00.240 --> 00:12:02.559 a major lawsuit with the New York attorney general 00:12:02.559 --> 00:12:05.220 over this. That's the one. The investigation 00:12:05.220 --> 00:12:07.159 found evidence that countrywide's loan officers 00:12:07.159 --> 00:12:09.759 were systematically steering borrowers, specifically 00:12:09.759 --> 00:12:12.620 black and Hispanic borrowers, into these high 00:12:12.620 --> 00:12:15.940 cost subprime loans, even when those same borrowers 00:12:15.940 --> 00:12:19.139 actually qualified for cheaper, safer prime loans. 00:12:19.220 --> 00:12:21.980 So wait. I walk in the door. I've got a 750 credit 00:12:21.980 --> 00:12:24.039 score. I qualify for the nice, simple 30 -year 00:12:24.039 --> 00:12:27.159 fix at 5%. But the salesperson actively convinces 00:12:27.159 --> 00:12:29.759 me to take the exploding ARM at 8 % instead. 00:12:30.000 --> 00:12:31.919 Yes. Why on earth would they do that? Simple. 00:12:32.100 --> 00:12:35.200 The incentives were perverse. The loan officers 00:12:35.200 --> 00:12:37.500 and brokers were paid much higher commissions. 00:12:37.860 --> 00:12:40.919 They were called yield spread premiums for selling 00:12:40.919 --> 00:12:43.620 the riskier, more expensive loans. The worse 00:12:43.620 --> 00:12:45.820 the deal was for you, the borrower, the bigger 00:12:45.820 --> 00:12:49.129 the payday was for them. That is just... It's 00:12:49.129 --> 00:12:51.490 pure predatory behavior. You're taking advantage 00:12:51.490 --> 00:12:54.169 of people who trust you as an expert and deliberately 00:12:54.169 --> 00:12:56.250 selling them a product that's bad for them because 00:12:56.250 --> 00:12:59.110 it's good for you. That was the accusation. And 00:12:59.110 --> 00:13:01.129 the evidence was pretty strong. I mean, internal 00:13:01.129 --> 00:13:04.110 documents showed they were approving loans for 00:13:04.110 --> 00:13:06.909 families that had as little as $1 ,000 in disposable 00:13:06.909 --> 00:13:09.490 income for the whole year. $1 ,000? That's not 00:13:09.490 --> 00:13:11.750 even one emergency. That's a flat tire. Exactly. 00:13:11.970 --> 00:13:13.490 They were just trying to get the deal closed, 00:13:13.649 --> 00:13:16.049 collect the fee, and pass the hot potato up the 00:13:16.049 --> 00:13:18.789 chain. And what's so wild is that at the time, 00:13:18.809 --> 00:13:20.990 there was this whole conflicting narrative around 00:13:20.990 --> 00:13:23.769 this, right? It wasn't framed as predatory. He 00:13:23.769 --> 00:13:26.629 was framed as inclusive. Oh, absolutely. This 00:13:26.629 --> 00:13:29.509 is the complexity of it. An economist named Stan 00:13:29.509 --> 00:13:31.690 Lebowitz pointed out that before the whole thing 00:13:31.690 --> 00:13:34.230 blew up, Fannie Mae actually gave countrywide 00:13:34.230 --> 00:13:37.990 awards. They called them a paragon of nondiscriminatory 00:13:37.990 --> 00:13:41.009 lending for using flexible underwriting criteria. 00:13:41.730 --> 00:13:44.129 Flexible underwriting. Another one of those great 00:13:44.129 --> 00:13:46.250 euphemisms. It's a very polite way of saying 00:13:46.250 --> 00:13:48.370 we ignore the traditional rules about income 00:13:48.370 --> 00:13:50.809 and credit scores. Right. At the time, Angelo 00:13:50.809 --> 00:13:53.690 Mazzillo would go on CNBC and he was very charismatic 00:13:53.690 --> 00:13:56.600 and he would say. They were democratizing the 00:13:56.600 --> 00:13:58.639 American dream. They were helping minorities 00:13:58.639 --> 00:14:01.100 and working class families get into homes that 00:14:01.100 --> 00:14:03.820 the old stuffy traditional banks would have turned 00:14:03.820 --> 00:14:05.379 down. And, you know, on some level they were. 00:14:05.580 --> 00:14:08.000 But they were doing it by strapping these families 00:14:08.000 --> 00:14:11.100 to financial time bombs. It's that classic tension 00:14:11.100 --> 00:14:14.139 between access and safety. If you take all the 00:14:14.139 --> 00:14:16.240 guardrails off the highway, sure, more people 00:14:16.240 --> 00:14:18.220 can get on. But you're going to have a lot more 00:14:18.220 --> 00:14:20.879 catastrophic crashes. And the crash was coming. 00:14:21.389 --> 00:14:23.710 But before we get to the explosion itself, we 00:14:23.710 --> 00:14:26.110 have to talk about the Friends of Angelo. Because 00:14:26.110 --> 00:14:29.350 while Countrywide was squeezing every last penny 00:14:29.350 --> 00:14:32.350 out of subprime borrowers, there was a completely 00:14:32.350 --> 00:14:34.570 different set of rules for the rich and powerful. 00:14:34.789 --> 00:14:37.509 The VIP program. This is the part of the story 00:14:37.509 --> 00:14:40.110 that just makes my blood boil. It's the smoking 00:14:40.110 --> 00:14:42.289 gun that proves this wasn't just, you know, market 00:14:42.289 --> 00:14:45.700 excess. This was outright corruption. It's a 00:14:45.700 --> 00:14:48.580 stunning contrast. The story was broken by reporters 00:14:48.580 --> 00:14:51.019 at Condé Nast Portfolio and The Wall Street Journal. 00:14:51.179 --> 00:14:54.259 They uncovered this internal program for FOAs, 00:14:54.500 --> 00:14:56.960 Friends of Angelo. And who was on this friends 00:14:56.960 --> 00:14:59.850 list? It was a who's who. of Washington, D .C. 00:14:59.889 --> 00:15:02.470 and the finance world. And this program gave 00:15:02.470 --> 00:15:04.590 them access to special treatment waived fees, 00:15:04.830 --> 00:15:07.690 lower interest rates, basically white glove service 00:15:07.690 --> 00:15:10.330 that no normal person could ever get. OK, give 00:15:10.330 --> 00:15:12.669 us some names. Senator Christopher Dodd. At the 00:15:12.669 --> 00:15:14.809 time, he was the chairman of the Senate Banking 00:15:14.809 --> 00:15:17.389 Committee. Wait, hold on. The actual chairman 00:15:17.389 --> 00:15:19.529 of the committee in charge of regulating the 00:15:19.529 --> 00:15:22.470 entire banking industry was getting a sweetheart 00:15:22.470 --> 00:15:24.549 mortgage deal from the biggest mortgage lender 00:15:24.549 --> 00:15:27.389 in the country. That's correct. Also on the list, 00:15:27.529 --> 00:15:30.289 Senator Kent Conrad, who is chairman of the Senate 00:15:30.289 --> 00:15:33.129 Budget Committee, and maybe the most damning 00:15:33.129 --> 00:15:36.730 of all, James Johnson and Franklin Raines. Who 00:15:36.730 --> 00:15:39.309 were they? They were both former CEOs of Fannie 00:15:39.309 --> 00:15:42.710 Mae. Fannie Mae. The biggest buyer of Countrywide's 00:15:42.710 --> 00:15:45.389 mortgages, the entity they needed to keep the 00:15:45.389 --> 00:15:48.629 whole machine running. And here are their former 00:15:48.629 --> 00:15:51.049 top executives getting millions of dollars in 00:15:51.049 --> 00:15:54.409 loans on very favorable terms. Franklin Raines 00:15:54.409 --> 00:15:57.389 alone reportedly got over $3 million in loans 00:15:57.389 --> 00:15:59.490 through the program. It just screams payoff. 00:15:59.750 --> 00:16:01.929 It looks like, hey, you keep the regulations 00:16:01.929 --> 00:16:04.370 light, you keep buying our risky loans, and we'll 00:16:04.370 --> 00:16:06.129 take care of your personal finances on the side. 00:16:06.360 --> 00:16:09.620 It greased the wheels. It created this cozy relationship 00:16:09.620 --> 00:16:12.700 at the absolute highest levels of power. And 00:16:12.700 --> 00:16:15.919 the irony is just it's suffocating. Because later 00:16:15.919 --> 00:16:18.600 on, Senator Dodd was one of the key figures proposing 00:16:18.600 --> 00:16:20.580 the government bailout of the mortgage industry. 00:16:20.799 --> 00:16:23.200 The guy writing the bailout bill was a VIP client 00:16:23.200 --> 00:16:25.000 of the company that needed the bailout. Yeah. 00:16:25.220 --> 00:16:27.820 You can't make this stuff up. You really can't. 00:16:27.820 --> 00:16:29.820 He just paints this picture of a system where 00:16:29.820 --> 00:16:32.679 the rules are for the little people. The smart 00:16:32.679 --> 00:16:34.440 money knew they were playing a different game. 00:16:34.889 --> 00:16:38.169 This scandal actually forced James Johnson to 00:16:38.169 --> 00:16:40.389 resign from Barack Obama's vice presidential 00:16:40.389 --> 00:16:43.470 search committee in 2008. It was a huge deal. 00:16:43.649 --> 00:16:46.389 So you've got this two -tiered system, predatory 00:16:46.389 --> 00:16:49.250 lending for the masses at the bottom and crony 00:16:49.250 --> 00:16:51.639 capitalism for the elites at the top. It's just 00:16:51.639 --> 00:16:54.019 a perfect storm waiting to break. And in August 00:16:54.019 --> 00:16:56.899 of 2007, the storm finally hit. That was the 00:16:56.899 --> 00:16:59.059 month the music stopped. Completely. Walk us 00:16:59.059 --> 00:17:01.120 through the mechanics of this, because most people 00:17:01.120 --> 00:17:03.799 think of the crash as 2008. They think of Lehman 00:17:03.799 --> 00:17:06.859 Brothers in September. But for countrywide, the 00:17:06.859 --> 00:17:09.140 heart attack happened a full year earlier. Right. 00:17:09.200 --> 00:17:11.180 Remember that secondary market we talked about? 00:17:11.319 --> 00:17:13.799 The investors who were buying up all those bundles 00:17:13.799 --> 00:17:17.039 of risky loans? In August 2007, the market for 00:17:17.039 --> 00:17:19.859 those nonconforming securities. It just froze 00:17:19.859 --> 00:17:22.619 solid. What does froze mean in practical terms? 00:17:22.819 --> 00:17:25.759 It means there were zero buyers at any price. 00:17:26.900 --> 00:17:29.420 Countrywide traders would call a hedge fund or 00:17:29.420 --> 00:17:31.859 a big bank and say, hey, we've got a billion 00:17:31.859 --> 00:17:34.839 dollar package of Altay mortgages. You want it? 00:17:34.880 --> 00:17:37.279 And the line would just go dead or they'd get 00:17:37.279 --> 00:17:39.779 a ridiculous offer like 50 cents on the dollar. 00:17:40.279 --> 00:17:42.200 So Countrywide has already paid out the cash 00:17:42.200 --> 00:17:44.440 to the homeowners. They're holding all this paper, 00:17:44.539 --> 00:17:47.759 these IOUs, and they desperately need to sell 00:17:47.759 --> 00:17:49.779 that paper to get their cash back so they can 00:17:49.779 --> 00:17:52.000 fund their own operations. And they can't. It's 00:17:52.000 --> 00:17:55.400 a classic liquidity crisis. Suddenly, they are 00:17:55.400 --> 00:17:57.859 stuck holding billions and billions of dollars 00:17:57.859 --> 00:18:00.400 in toxic assets that are losing value by the 00:18:00.400 --> 00:18:02.859 hour. And this is when the panic starts. The 00:18:02.859 --> 00:18:05.640 panic starts on August 6th when a smaller competitor, 00:18:05.880 --> 00:18:08.700 American Home Mortgage, suddenly collapses and 00:18:08.700 --> 00:18:11.299 files for bankruptcy. And everyone in the market 00:18:11.299 --> 00:18:13.519 knew they were playing the same game as Countrywide, 00:18:13.619 --> 00:18:16.500 just on a smaller scale. So all eyes immediately 00:18:16.500 --> 00:18:18.680 turned to Countrywide. And they had to file a 00:18:18.680 --> 00:18:21.380 disclosure with the SEC. Right. Yes. They had 00:18:21.380 --> 00:18:23.839 to publicly admit that these market disruptions 00:18:23.839 --> 00:18:25.799 could seriously harm their financial condition. 00:18:26.400 --> 00:18:29.099 In the world of banking, admitting you might 00:18:29.099 --> 00:18:31.839 have a liquidity problem is like yelling fire 00:18:31.839 --> 00:18:35.119 in a crowded theater. It started at the stampede. 00:18:35.119 --> 00:18:38.250 And it led to an actual physical bank run. People 00:18:38.250 --> 00:18:40.849 lining up with their branches. It did. It wasn't 00:18:40.849 --> 00:18:42.990 just Wall Street investors. It was regular people 00:18:42.990 --> 00:18:45.410 who had their life savings in a countrywide bank 00:18:45.410 --> 00:18:48.730 savings account. On August 17th, there were lines 00:18:48.730 --> 00:18:51.250 around the block. Billions of dollars were pulled 00:18:51.250 --> 00:18:54.450 out. The stock price was in free fall. The cost 00:18:54.450 --> 00:18:56.569 to insure their debt against default shot up 00:18:56.569 --> 00:18:59.470 22 percent in a single day. So they were bleeding 00:18:59.470 --> 00:19:01.730 out fast. What did they do? What were their emergency 00:19:01.730 --> 00:19:04.069 measures? They pulled the ripcord on everything 00:19:04.069 --> 00:19:08.089 they had. They had a massive $11 .5 billion credit 00:19:08.089 --> 00:19:11.089 line with a group of other big banks. They drew 00:19:11.089 --> 00:19:13.269 down the entire thing in one go. They maxed out 00:19:13.269 --> 00:19:15.849 their credit card. Every last cent. It was a 00:19:15.849 --> 00:19:17.470 signal to the market that they were hoarding 00:19:17.470 --> 00:19:20.710 cash, preparing for a siege. And even that wasn't 00:19:20.710 --> 00:19:23.119 enough. The Federal Reserve had to step in and 00:19:23.119 --> 00:19:26.019 start emergency lending operations just to calm 00:19:26.019 --> 00:19:28.559 the markets. And this is when Bank of America 00:19:28.559 --> 00:19:31.740 first gets involved. This is August 2007. Right. 00:19:31.859 --> 00:19:35.059 Bank of America makes a $2 billion investment 00:19:35.059 --> 00:19:38.000 in Countrywide. They bought a special kind of 00:19:38.000 --> 00:19:41.319 preferred stock. At the time, BOFA's CEO, Ken 00:19:41.319 --> 00:19:44.259 Lewis, he thought he was being the hero, the 00:19:44.259 --> 00:19:46.440 white knight. He thought he was getting a bargain 00:19:46.440 --> 00:19:48.579 on a fundamentally great company that was just 00:19:48.579 --> 00:19:51.519 having a temporary liquidity squeeze. A $2 billion 00:19:51.519 --> 00:19:54.500 Band -Aid on a mortal wound. I mean, what a catastrophic 00:19:54.500 --> 00:19:56.980 miscalculation. One of the biggest in history. 00:19:57.200 --> 00:19:59.500 But while all this financial chaos was happening 00:19:59.500 --> 00:20:01.900 inside Countrywide, things were getting truly 00:20:01.900 --> 00:20:04.539 bizarre. We have to talk about the Protect Our 00:20:04.539 --> 00:20:06.579 House campaign. Oh, this is my favorite detail. 00:20:06.839 --> 00:20:08.900 It feels like it's ripped from an episode of 00:20:08.900 --> 00:20:11.299 The Office, but like a much, much darker version. 00:20:11.740 --> 00:20:14.980 It's September 2007. The company is on fire. 00:20:15.099 --> 00:20:17.740 The stock is collapsing. They're in the middle 00:20:17.740 --> 00:20:20.480 of laying off 20 percent of their entire workforce. 00:20:20.880 --> 00:20:24.059 And what does management decide is the solution. 00:20:24.619 --> 00:20:27.579 A loyalty oath. A loyalty oath. They rolled out 00:20:27.579 --> 00:20:30.779 this internal PR campaign. They literally asked 00:20:30.779 --> 00:20:34.019 all remaining employees to sign a pledge to tell 00:20:34.019 --> 00:20:36.640 the countrywide story and defend the company 00:20:36.640 --> 00:20:39.099 from bad press. And if you signed it, you got 00:20:39.099 --> 00:20:41.359 what, a wristband? I got a bright green rubber 00:20:41.359 --> 00:20:43.579 wristband that said, protect our house. And what 00:20:43.579 --> 00:20:45.900 if you didn't sign it? If you didn't wear the 00:20:45.900 --> 00:20:48.099 bracelet? Senior managers reportedly made it 00:20:48.099 --> 00:20:50.079 very clear that if you weren't wearing the green 00:20:50.079 --> 00:20:52.380 wristband, you weren't on the team. And if you 00:20:52.380 --> 00:20:54.910 weren't on the team, eh. They were still laying 00:20:54.910 --> 00:20:57.190 people off. Can you imagine the atmosphere in 00:20:57.190 --> 00:20:59.049 that office? Your friends are getting fired. 00:20:59.210 --> 00:21:01.190 You know the loans you're processing are garbage. 00:21:01.369 --> 00:21:03.690 The news is saying your company's going bankrupt. 00:21:03.890 --> 00:21:06.150 And your boss is making you wear a piece of rubber 00:21:06.150 --> 00:21:09.049 jewelry to prove you're still loyal. It's dystopian. 00:21:09.250 --> 00:21:12.670 It shows a leadership team that was completely, 00:21:12.789 --> 00:21:15.970 utterly detached from reality. They thought they 00:21:15.970 --> 00:21:18.250 could fix a solvency crisis with a pep rally. 00:21:18.670 --> 00:21:20.750 But, you know, the math always wins in the end. 00:21:20.890 --> 00:21:24.250 And by December 2007, the game was up. It was 00:21:24.250 --> 00:21:27.130 over. That's when Angelo Mozilla made the call 00:21:27.130 --> 00:21:29.710 to Ken Lewis at Bank of America. And according 00:21:29.710 --> 00:21:32.430 to Lewis, Mozilla was ready to throw in the towel. 00:21:32.609 --> 00:21:34.609 Let's talk about the valuation here. This is 00:21:34.609 --> 00:21:36.769 the wealth destruction part of the story. It's 00:21:36.769 --> 00:21:39.750 breathtaking. Just one year earlier, in early 00:21:39.750 --> 00:21:43.049 2007. Countrywide's market value was about $24 00:21:43.049 --> 00:21:46.230 billion. Okay. When Bank of America announced 00:21:46.230 --> 00:21:49.650 the plan to buy them in January 2008, the price 00:21:49.650 --> 00:21:53.049 tag was roughly $4 billion. From $24 billion 00:21:53.049 --> 00:21:57.549 down to $4 billion, 85 % of the value just evaporated. 00:21:57.630 --> 00:21:59.890 And it got even worse. Because the deal was an 00:21:59.890 --> 00:22:02.230 all -stock deal, BOFA was paying with its own 00:22:02.230 --> 00:22:04.750 shares, and BOFA's stock was also falling because 00:22:04.750 --> 00:22:07.190 of the crisis. So by the time the deal actually 00:22:07.190 --> 00:22:10.529 closed in July 2008, the final acquisition was 00:22:10.529 --> 00:22:13.970 closer to $2 .5 billion. $2 .5 billion to buy 00:22:13.970 --> 00:22:16.569 the biggest mortgage lender in America. On paper, 00:22:16.630 --> 00:22:18.670 that sounds like the steal of the century. It's 00:22:18.670 --> 00:22:20.529 like buying a mansion for the price of a tool 00:22:20.529 --> 00:22:22.869 shed. That is exactly what Ken Lewis thought. 00:22:23.170 --> 00:22:25.690 He famously said, and this quote will haunt him 00:22:25.690 --> 00:22:28.609 forever, we weighed the short -term pain versus 00:22:28.609 --> 00:22:31.490 what we think will be a very good deal. He sent 00:22:31.490 --> 00:22:34.450 a team of 60 analysts to Countrywide's headquarters 00:22:34.450 --> 00:22:36.750 to go through their books. They thought they 00:22:36.750 --> 00:22:39.069 understood the risk. But they made a fatal mistake. 00:22:39.599 --> 00:22:42.259 They analyzed the credit risk, the risk that 00:22:42.259 --> 00:22:44.660 the homeowners would default. They completely 00:22:44.660 --> 00:22:47.660 and totally underestimated the legal risk. 100%. 00:22:47.660 --> 00:22:50.359 When you buy a company, you don't just buy its 00:22:50.359 --> 00:22:53.440 assets and its branch offices. You buy its liabilities. 00:22:53.460 --> 00:22:56.859 You buy its past sins. Bank of America inherited 00:22:56.859 --> 00:23:00.500 the legal responsibility for every single fraudulent 00:23:00.500 --> 00:23:04.039 loan, every predatory practice, every false statement 00:23:04.039 --> 00:23:06.339 Countrywide had made for the past decade. And 00:23:06.339 --> 00:23:09.160 the bill for those sins. They're tallying it 00:23:09.160 --> 00:23:11.559 up because Bank of America Home Loans was born, 00:23:11.700 --> 00:23:14.019 but the ghost of Countrywide haunted them for 00:23:14.019 --> 00:23:16.640 a very, very long time. The legal bills were 00:23:16.640 --> 00:23:20.000 astronomical. Almost immediately, in October 00:23:20.000 --> 00:23:23.519 of 2008, they had to settle that massive predatory 00:23:23.519 --> 00:23:26.000 lending lawsuit brought by a bunch of state attorneys 00:23:26.000 --> 00:23:29.059 general. That settlement alone required them 00:23:29.059 --> 00:23:32.980 to modify loans worth up to $8 .4 billion. $8 00:23:32.980 --> 00:23:35.700 .4 billion. Let's just pause on that. They paid 00:23:35.700 --> 00:23:38.500 $2 .5 billion for the entire company, and their 00:23:38.500 --> 00:23:41.619 first act is to pay an $8 .4 billion settlement. 00:23:42.339 --> 00:23:45.180 They are $6 billion in the hole from day one. 00:23:45.450 --> 00:23:47.490 They're already massively underwater. And that 00:23:47.490 --> 00:23:49.670 was just the appetizer. The main course came 00:23:49.670 --> 00:23:52.609 in 2014 when Bank of America finally reached 00:23:52.609 --> 00:23:54.450 a settlement with the U .S. Department of Justice 00:23:54.450 --> 00:23:57.170 over the sale of all those toxic mortgage backed 00:23:57.170 --> 00:23:59.329 securities. What was the price tag on that one? 00:23:59.470 --> 00:24:03.529 Nearly 17 billion dollars. Yeah. 16 .65 to be 00:24:03.529 --> 00:24:05.569 exact. 17 billion. It's a number so big it's 00:24:05.569 --> 00:24:08.589 hard to even process. And a huge percentage of 00:24:08.589 --> 00:24:11.029 those toxic securities that led to that fine 00:24:11.029 --> 00:24:14.119 originated at Countrywide. If you add it all 00:24:14.119 --> 00:24:16.559 up, the purchase price, the dozens of settlements, 00:24:16.779 --> 00:24:20.240 the legal fees, the loan write downs. Most analysts 00:24:20.240 --> 00:24:22.799 estimate that the countrywide acquisition ultimately 00:24:22.799 --> 00:24:26.119 cost Bank of America more than 50 billion dollars. 00:24:26.759 --> 00:24:30.819 $50 billion in losses on a $2 .5 billion purchase. 00:24:31.359 --> 00:24:33.799 It was a black hole that sucked capital out of 00:24:33.799 --> 00:24:36.539 Bank of America for years. It destroyed Ken Lewis's 00:24:36.539 --> 00:24:39.299 career. It permanently damaged their brand. It 00:24:39.299 --> 00:24:42.160 is the textbook case study in what happens when 00:24:42.160 --> 00:24:44.759 you let deal fever blind you to the real risks. 00:24:45.019 --> 00:24:46.619 And what happened to the men at the top? What 00:24:46.619 --> 00:24:48.779 about Mozilo? Did he face any real consequences? 00:24:49.240 --> 00:24:51.859 Not jail time, no. The SEC did charge him in 00:24:51.859 --> 00:24:54.319 2009 with insider trading and securities fraud. 00:24:54.500 --> 00:24:56.650 The accusation being what? The accusation was 00:24:56.650 --> 00:24:58.289 that he was aggressively selling his own shares 00:24:58.289 --> 00:25:00.990 of countrywide stock. He made almost $300 million 00:25:00.990 --> 00:25:04.769 in profit between 2005 and 2007. At the exact 00:25:04.769 --> 00:25:06.589 same time, he was publicly telling shareholders 00:25:06.589 --> 00:25:08.450 that the company was rock solid and the loan 00:25:08.450 --> 00:25:10.670 portfolio was sound. So the captain was filling 00:25:10.670 --> 00:25:12.950 his own lifeboat with gold while telling the 00:25:12.950 --> 00:25:15.069 passengers the ship was unsinkable. That's a 00:25:15.069 --> 00:25:17.269 pretty good analogy. He eventually settled with 00:25:17.269 --> 00:25:20.680 the SEC. He paid a fine of about $67 million, 00:25:20.960 --> 00:25:24.539 and he agreed to a lifetime ban from ever being 00:25:24.539 --> 00:25:27.000 an officer or director of a public company again. 00:25:27.519 --> 00:25:30.720 $67 million is a lot of money, but compared to 00:25:30.720 --> 00:25:33.559 the $300 million he made? It's a fraction. He 00:25:33.559 --> 00:25:35.619 never admitted any wrongdoing, and he walked 00:25:35.619 --> 00:25:38.779 away a very, very wealthy man. Countrywide, he 00:25:38.779 --> 00:25:41.220 even paid for his legal defense. Of course they 00:25:41.220 --> 00:25:43.700 did. Before we wrap, there's one other little 00:25:43.700 --> 00:25:45.400 footnote in this story that's worth mentioning. 00:25:46.039 --> 00:25:50.640 IndyMac. Ah, yes. Countrywide's evil twin. IndyMac 00:25:50.640 --> 00:25:52.519 started as a spinoff from Countrywide, right? 00:25:52.680 --> 00:25:56.079 It did, way back in 97. It became its own independent 00:25:56.079 --> 00:25:58.819 bank, but it had the same DNA, the same aggressive 00:25:58.819 --> 00:26:01.660 culture, the same focus on those risky alte and 00:26:01.660 --> 00:26:05.200 subprime loans. And in July of 2008, at the exact 00:26:05.200 --> 00:26:07.500 same moment, Bank of America was finalizing the 00:26:07.500 --> 00:26:10.299 Countrywide deal IndyMac collapsed. And that 00:26:10.299 --> 00:26:12.890 was a very ugly failure. It was. The biggest 00:26:12.890 --> 00:26:15.869 bank failure in a generation at that point, federal 00:26:15.869 --> 00:26:18.250 regulators had to seize it after a massive bank 00:26:18.250 --> 00:26:21.049 run. You saw those pictures on the news. People 00:26:21.049 --> 00:26:23.430 lined up for blocks in the hot summer sun in 00:26:23.430 --> 00:26:25.890 California, desperate to get their life savings 00:26:25.890 --> 00:26:29.109 out. It was this really visceral, terrifying 00:26:29.109 --> 00:26:32.569 preview of the wider chaos that was about to 00:26:32.569 --> 00:26:35.210 hit that fall with Lehman Brothers. It really 00:26:35.210 --> 00:26:37.509 proved that the business model itself was fundamentally 00:26:37.509 --> 00:26:40.569 broken. It wasn't just a few bad managers at 00:26:40.569 --> 00:26:43.779 Countrywide. The whole philosophy of originate 00:26:43.779 --> 00:26:46.180 to distribute without any skin in the game was 00:26:46.180 --> 00:26:49.500 just a suicide pact. It was a model built entirely 00:26:49.500 --> 00:26:52.839 on one flawed assumption that home prices on 00:26:52.839 --> 00:26:55.859 a national level would never, ever go down. Once 00:26:55.859 --> 00:26:57.700 that one assumption broke, the whole machine 00:26:57.700 --> 00:27:00.039 went into reverse. And instead of printing money, 00:27:00.180 --> 00:27:02.220 it started destroying capital at a rate the world 00:27:02.220 --> 00:27:04.579 had never seen before. So let's try and synthesize 00:27:04.579 --> 00:27:06.660 this whole epic story. You have a company that 00:27:06.660 --> 00:27:09.819 starts small, delivers a 23 ,000 % return, becomes 00:27:09.819 --> 00:27:11.740 the absolute center of the American housing market, 00:27:11.900 --> 00:27:14.539 seduces Wall Street, corrupts Washington, and 00:27:14.539 --> 00:27:16.259 then implodes in the most spectacular fashion 00:27:16.259 --> 00:27:19.339 imaginable. And I think the key lesson, if you're 00:27:19.339 --> 00:27:21.859 trying to make sense of it all, is to look past 00:27:21.859 --> 00:27:25.380 the complicated acronyms, you know, the MBSs 00:27:25.380 --> 00:27:29.240 and the CDOs. That's all just noise. The core 00:27:29.240 --> 00:27:32.420 story is incredibly simple. It's about misaligned 00:27:32.420 --> 00:27:35.480 incentives. If you pay a salesman a huge commission 00:27:35.480 --> 00:27:38.859 to sell a bad product. he's going to sell a lot 00:27:38.859 --> 00:27:41.220 of that bad product. And if you pay a CEO in 00:27:41.220 --> 00:27:43.299 stock options that reward short -term gains, 00:27:43.539 --> 00:27:46.319 he's going to take massive long -term risks to 00:27:46.319 --> 00:27:49.759 juice the stock price now. And if you give powerful 00:27:49.759 --> 00:27:52.519 politicians VIP treatment and special deals, 00:27:52.839 --> 00:27:54.720 they are probably going to look the other way 00:27:54.720 --> 00:27:56.980 when it's time to enforce the rules. It all comes 00:27:56.980 --> 00:27:58.789 down to the human element. We can talk about 00:27:58.789 --> 00:28:00.869 risk models and algorithms all day, but this 00:28:00.869 --> 00:28:03.390 was a story about greed and fear and ambition 00:28:03.390 --> 00:28:05.890 and who had the power. And the victims of that 00:28:05.890 --> 00:28:08.069 were real people. We talk about borrowers and 00:28:08.069 --> 00:28:10.410 subprime, like they're just abstract data points. 00:28:10.750 --> 00:28:12.430 But these were families who lost their homes. 00:28:12.549 --> 00:28:14.309 These were employees who were forced to sign 00:28:14.309 --> 00:28:16.349 loyalty oaths and then lost their jobs and their 00:28:16.349 --> 00:28:18.990 careers. These were retirees who had their pension 00:28:18.990 --> 00:28:21.009 funds invested in countrywide stock that went 00:28:21.009 --> 00:28:23.410 to zero. That's the part that really sticks with 00:28:23.410 --> 00:28:26.049 me. The friends of Angelo and the executives, 00:28:26.289 --> 00:28:28.769 they all had a soft landing. But the regular 00:28:28.769 --> 00:28:31.910 people at the bottom of the pyramid just hit 00:28:31.910 --> 00:28:35.349 the pavement hard. Which leaves you with a pretty 00:28:35.349 --> 00:28:38.359 provocative thought to mull over. We're always 00:28:38.359 --> 00:28:40.220 told that our financial system is supposed to 00:28:40.220 --> 00:28:42.980 be this rational risk -based meritocracy, right? 00:28:43.220 --> 00:28:46.059 You get a loan based on your credit score. But 00:28:46.059 --> 00:28:48.319 when you pull back the curtain on a company like 00:28:48.319 --> 00:28:50.980 Countrywide, you see that the people at the very 00:28:50.980 --> 00:28:52.740 top, the ones writing the laws and setting the 00:28:52.740 --> 00:28:55.079 rules, were playing a completely different game 00:28:55.079 --> 00:28:57.380 with a completely different set of rules. So 00:28:57.380 --> 00:29:00.559 when the whole system finally broke, was it really 00:29:00.559 --> 00:29:03.240 because of lax standards for poor people trying 00:29:03.240 --> 00:29:05.839 to buy a home? Or was it because the people on 00:29:05.839 --> 00:29:07.960 the penthouse were too busy enjoying the party 00:29:07.960 --> 00:29:10.559 to ever check the building's foundation? I think 00:29:10.559 --> 00:29:12.240 when you look at the evidence, the answer becomes 00:29:12.240 --> 00:29:14.359 pretty clear. So the next time you look at your 00:29:14.359 --> 00:29:16.700 own mortgage statement, take a second to think 00:29:16.700 --> 00:29:19.099 about the long, strange journey that piece of 00:29:19.099 --> 00:29:20.900 paper has taken through the global financial 00:29:20.900 --> 00:29:23.960 system. It's never just a piece of paper. Thanks 00:29:23.960 --> 00:29:25.819 for listening to The Deep Dive. We'll see you 00:29:25.819 --> 00:29:26.200 next time.