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I’m willing to bet that fewer than half of Epsilon Theory readers know who Angelo Mozilo is. And that’s a shame, because no one better epitomizes the intense financialization of the American stock market from 2001 – 2007 than Angelo. No one better epitomizes the corrupt lending and securitization practices that led directly to the Great Financial Crisis of 2008 than Angelo.
The fact that Angelo Mozilo was allowed to pay a $67 million fine (leaving him with only … oh, $400 million or so left over) on SEC insider trading charges and walk away scot-free from ALL criminal prosecution is something I will NEVER forgive Eric Holder and Barack Obama for. Google “friends of Angelo” when you get a chance. Only Dick Fuld, who oversaw the Repo 105 fraud at Lehman (and who also skated from any criminal OR civil prosecution), makes my blood boil more than Angelo Mozilo.
But this isn’t a note about Angelo Mozilo.
This is a note about Countrywide’s quarterly earnings call in 2008, when Angelo, in response to an analyst’s question, said that sharply increasing mortgage delinquencies and failures were NOT limited to sub-prime, but were now in Alt-A mortgages, too.
I’ll never forget that call. With one comment, Angelo gave the lie to everything Ben Bernanke and Hank Paulson had been saying about the “well-contained” nature of the sub-prime mortgage crisis. You could almost feel the thermonuclear energy coming off that call and spreading throughout the professional investment community.
Markets were never the same after that.
From that call forward, no professional investor responsible for Other People’s Money trusted a single word they heard from Bernanke or the Bush White House on the “containment” of sub-prime delinquencies. No professional investor worth his or her salt trusted a single word they heard in the following months from Merrill and Bear and Goldman and Citi about the marks they had on their RMBS assets. This wasn’t just a US thing. The Europeans were much more flagrant liars. Even as all hell started to break loose for US banks in the summer of 2008, European banks valued their massive portfolios of Alt-A securities at 97 cents on the dollar, all rated AAA, natch. They were ALL liars. All of them. Without exception.
After that Countrywide earnings call in 2008, I trusted NO ONE in government or Wall Street to tell the truth about the mortgage crisis.
And that’s the way I feel about COVID-19 today.
In 2008, you could not trust a single word that anyone in government or the financial services sector told you about their exposure to bad mortgage securities. And because you had zero trust … because you had zero visibility into the actual exposures that banks actually had … you SOLD.
In 2020, it’s exactly the same thing. I do not trust a single word that anyone in the U.S. government (or the Japanese government or the Chinese government) tells us about our exposure to this virus. I believe that most professional investors feel the same way.
And when you have no trust … you SELL.