Blog Special Part 2: Countrywide Correlation

If you haven't read "Blog Special Part 1: The Enron Story That Waited to be Told", a January 18, 2002 Washington Post story written by Howard Kurtz, please do so and just reflect on that story. I will attempt to correlate the striking similarities between Enron and Countrywide.

Just to refresh the reader's memory, Enron was quite possibly the biggest corporate scandal and fraud of the 21st Century. It had all the elements of main stream media irresponsibility, individual and corporate greed, and public gullibility.

So, here are the correlations:

Correlation #1: FULL SCALE PROPAGANDA
Countrywide continues to preach the strength of their business using CNBC twice (once with Maria Bartiromo and the other with Jim Cramer on Mad Money) all within the week. Mr. Mozilo appeared on CNBC's Mad Money on the same day that he sent his lieutenant, chief legal officer Sandor Samuels to testify on behalf of the company in front of Congressional panel assembled by Senator Christopher Dodd. This despite growing evidence of subprime crisis and unusually large insider selling. Countrywide continues to deny this day that their business model will not be affected adversely by the subprime crisis and housing bubble.

Enron, in response to a story broken by Fortune magazine reporter Bethany McLean, goes on full scale offensive defending the strength of their business. CEO Jeffrey Skilling calls McLean and tells her she is unethical and hangs up on her. Chairman Kenneth Lay calls the Fortune magazine managing editor to complain. COO Andrew Fastow flies to New York to tell McLean and the editors that the business was in great shape, contrary to the story by McLean.

Correlation #2: CLUELESS ANALYSTS
Countrywide has gotten continued support from Morningstar as a 5 star value and gets a Strong Buy rating. Many Wall Street Firms have upgraded this stock within the past 2 weeks. The notable decenter is S&P who continues to maintain a sell rating along with Goldman Sachs. But overall, Countrywide and its CEO Andrew Mozilo is highly regarded and is part of the S&P 500. Many of the Wall Street Pundits and Analysts still believe that this company is sound and should benefit from the fall out from the housing bubble and subprime crisis. This despite the fact that the insiders including Mozilo and others continue to liquidate their positions at an alarming rate. Additionally, the financial community continues to "believe" in this company despite the sudden departure of the COO Stanford Kurland in September 06, who was widely regarded to suceed Mozilo when he planned to retire in December 06 at age 68. Nothing is known why the sudden departure and my current efforts at unearthing the whereabouts of Mr. Kurland is met with no results. Additionally, today March 30, 2007, two long time board members have quit as of immediately without reason. These two board members are Kathleen Brown and Michael Dougherty. Mr. Dougherty has also been actively liquidating his shares in the company before this announcement.

Enron was also loved by Wall Street. Most analysts had a "buy" rating on the company before the whole scandal unraveled. Like Angelo Mozilo, Kenneth Lay was respected and shared a friendship with the president George Bush. Everything seemed to be business as usual and the general mainstream media could not uncover the dark truth of fraud and deception. At the time, Fortune magazine had named Enron the "America's most innovative company for six straight years". Likewise, Countrywide's Angelo Mozilo was named by Barron's Magazine as one of America's most influential CEO's, despite continued evidence mounting against possible irregularities in Angelo Mozilo and the company's insider selling activity. In August 2001, Kenneth Lay tells Fortune magazine managing editor Rik Kirkland that he didn't like McLean's story questioning Enron. A week later, Jeffrey Skilling CEO quits suddenly after 6 months on the job citing "personal reasons". Even then, the mainstream financial business media was clueless and did not run with McLean's story.

Correlation #3: OFF THE BOOKS ACCOUNTING
Countrywide is doing a $2.8 billion buy back of its shares by using debt. But that debt is categorized as "Off Book" balance. Additional observation into the recent 10K for the entire year of 2006 shows that Countrywide is using aggressive "Off Book" accounting measures in addition to the $2.8 billion in buy back of stocks. There are more questions than answers in regards to the CDO's and rising foreclosures. Additional questions arise when dealing with the Alt A- option ARMS which are "technically" classified as prime loans despite their risky nature. Countrywide continues to maintain that their mortgage portfolio only consists of 7% of subprime loans despite being number 3 in subprime mortgage originations to the now nearly defunct New Century. In recent article by LA Biz Observer http://laobserved.com/biz/2006/09/will_angelo_mozilo_r.php also states that Countrywide has been a notoriously "opaque" company and they don't really know how the company is actually run.

Enron abruptly fired Fastow CFO in October 2001 for questionable "Off the Books Partnerships" and later in November 2001 admitted to overstating its profits by $600 million. I believe the ALT-A Option ARM loans and being #3 highest originator of subprime loans coupled with meteoric rise of foreclosure inventory in Countrywide's books can be similar to this situation. But the main take home message is the Off Books accounting.

Correlation #4: TIME LINE TO MELTDOWN
Countrywide is set to change guards when possibly Angelo Mozilo will announce his retirement on CNBC in what will turn out to be the third appearance in less than two weeks at that television network. We already had the sudden departure of COO Stanford Kurland in September 8, 2006 for "personal" reasons. Then departure of two long time board members Mr. Dougherty and Mrs. Brown who were long time fixtures on the board on March 30, 2007. This was announced well after the markets had closed at 8:00 PM EST. Despite growing evidence towards something being drastically wrong, many analysts and financial commentators remain bullish on the "long term" prospects of this company.

Enron's Jeffrey Skilling CEO suddenly resigned on August 2001 after serving 6 months as CEO finanlly raising questions. Just as Stanford Kurland COO who was slated to replace Angelo Mozilo who left abruptly in September 2006 for "personal" reasons. In October 2001, Fastow CEO was fired for questionable "off book partnerships". On December 2, 2001, Enron declared bankruptcy.

All in all it took Enron 5 months before declaring bankruptcy and for the mainstream media to finally catch on. Even Jim Cramer who was bullish on Enron until Skilling abruptly quit for "personal" reasons, was not bearish until then despite overwhelming evidence. Likewise, Countrywide had the departure of their future CEO Kurland on September 2006 and the two long time board members abruptly quit without reason, after dumping all of their shares, Mrs. Brown and Mr. Dougherty on March 30, 2007. If we correlate the similarities of Enron and Countrywide, then Countrywide should announce something earth shattering soon. Because Angelo Mozilo is slated to announce something on Monday April 2, 2007, full 6 months after sudden departure of Mr. Kurland.

MY TAKE:
There are too much similarities between Enron and Countrywide.
1. We are coming off of a bubble (dot com for Enron) (housing for Countrywide)
2. Too many insiders are abruptly leaving for both.
3. Enron and Countrywide were much loved by the Wall Street.
4. Analysts continued to have buy ratings or were upgrading both stocks before the down fall.
5. Both are using aggressive "off the books" accounting.
6. Both companies are aggressively resorting to Public relations scheme to keep shares afloat.
7. Insiders are dumping the shares of the stocks.
8. Founders of both companies Kenneth Lay and Angelo Mozilo relinquished the CEO job and remained on the Board.
9. Financial communities are still seeing Countrywide in positive "light" despite evidences to the contrary and growing scandals in other similar companies as did Enron.
10. Time line is much too close before events unfold just as Enron took full 5 months before these departures of insiders currently, Countrywide is 6 months out since the departure of Mr. Kurland who left abruptly.
11. Board members are abandoning the company abruptly without giving a statement for both companies.

I think something like Bankruptcy might be on the horizon.