Failure of Corporate Governance, Incentive Compensation, & the Sub-Prime Crisis
Countrywide Financial was a mortgage-banking firm. They had one of the largest market shares in the early 2000s, when the mortgage market was booming. “No company pursued growth in home loans more aggressively than Countrywide” (NY Times 12/10). They were the leader of their industry, with 500 billion in home loans, 62,000 employees, 900 offices, and $200 billion in assets. Everything had been going well for the company and its employees, until the mortgage crisis began to unfold at the end of 2006. In June 2009, the SEC filed a civil suit against the founder of the business and some of his top management for fraud and insider trading. This came at the height of the mortgage crisis in the US. The founder of Countrywide, Angelo Mozilo, finally agreed to pay $45million in profits and $22.5 million in civil penalties, in which he still admits no wrongdoing. Company’s Profile and History
Countrywide was founded as Countrywide Credit Industries in 1969 by Mr. Mozilo, a butcher’s son from the Bronx in New York and David Loeb, who had founded another mortgage bank in New York. By 1974, they already had eight offices but were still struggling with cash flow. Loeb grew increasingly upset with the way business was going and eventually fired 92 of Countrywide’s 95 employees and shut down all the offices at once. Loeb believed that this decision would shift Countrywide’s philosophy from its emphasis on the sales team, towards a more “product driven” philosophy, as most of the 92 people fired were highly paid salesmen. They begun to see signs of hope, as interest rates in the economy lowered.
By 1978 profits resumed at the company, and Countrywide experienced constant growth throughout the 1980s. But even as Countrywide experienced consistent growth during this period, it was in the early 1990s that revenues begun to increase rapidly. As a result of the collapse of the Savings and Loan industry, Countrywide was able to acquire a wave of new businesses and since it was a public company, it was not faced with shortages of capital that other mortgage lenders- most of who depended on bank financing- faced. An additional growth avenue for Countrywide during this period was the foray into the traditionally underserved low and middle-income market. In 1992, the company launched the "House America" program, to attend to this need. The House America program was generally designed to provide mortgages to borrowers who lacked the finances, the credit history, or the stable employment necessary to qualify for a traditional loan. At the time, this move was unprecedented in the mortgage industry. By the end of 1992, Countrywide was the largest mortgage lender in the US, and though it lost this distinction shortly thereafter, it regained this status by 2004. Key Success Factors:
For any company to be successful, they have to know what it is they must achieve and strive for to get there. They have to set goals and know where they need to be headed in order to achieve excellence. For Countrywide, the following were the key success factors to help them be the leader of their industry: A superior mix of businesses, anchored by the mortgage lending activities Leading-edge technology, consistently refined to meet the Company’s needs of meetings earnings and being the best Best-in-class governance, internal controls and risk mitigation activities, all put into place ahead of Countrywide’s growth New product development
Market Share growth
Sales Force Expansion
Increasing technological leadership
These factors were achievable, as Countrywide proved they could be the best during their earlier existence. Over time, however, the management lost sight of what they were striving for and tried to take shortcuts and get away with illegal activities. This seemed to come about after the...
References: Countrywide CEO Forfeits $37.5 Million as He Exits,” The Wall Street Journal, Jan. 28, 2008. 12/04/2010
NBC News, July 1, 2008.
Countrywide 's Mortgage Woes Deepen,” The Wall Street Journal, March 3, 2008. 12/05/2010
“Countrywide Financial Corp” www.riskmetrics.com/proxy_advisory. 12/04/10
Countrywide Form 10-K filed with the SEC on Feb 26, 2007.
"Inside the Countrywide Lending Spree". Gretchen Morgenson Aug 20, 2007. New York Times. 12/05/2010
Merchant, Kenneth A., and Wim A. Van der Stede. Management Control Systems – Performance Measurement, Evaluation and Incentives. Harlow, England: Prentice Hall, 2007.
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