Investing

Will Countrywide's (CFC) Goon Squad Go To The Gallows?

The FBI appears to have uncovered some fraud in lending practices at Countrywide (CFC) and now the question is whether management knew. As Captain Renault said in a scene in Casablanca "I’m shocked, shocked to find that gambling is going on in here." Of course, he owned part of the casino.

According to The Wall Street Journal the Feds have "turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers." Some loans were made without income verification or tax returns. Worse, in other cases sales people inflated the income numbers from certain borrowers to help close the deals. Of course the sales people were getting a piece of the action. Who can blame them?

The first problem that CFC has is that making loans based on false data is usually frowned upon. Not disclosing the practice and its potential impact on earnings is also something about which the government takes a dim view.

The most intriguing question now if whether there is evidence to be had that the people in the corner offices at CountryWide knew what was going on. Were they so many Nixons covering their trails?

Mozilo and his thugs must have known something was up. They did not build the largest mortgage bank in the US by being idiots.

Bank of America (BAC), which is about to buy Countrywide, is going to get more than its hands dirty because of the transaction. The web of bad, and perhaps illegal, practices at CFC gets worse by the day. B of A. would be best to sneak out a side door.

Douglas A. McIntyre

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