SEC "Invites" Countrywide and Others for Investigation

"Broader Investigation of Lenders by SEC" was published today and written by Marcy Gordon, a business writer. Senator Dodd is spearheading this investigation. Senator Dodd is the chairman of the Senate Banking Comittee. My take on this investigation is that it will lead to further investigations and further insights into the problems inherent with the mortgage lending industry. One of the main purpose of this investigation is to see the extent to which the top 5 subprime mortgage lenders have engaged in "predatory" lending practices and to see the "factors" that contributed to this problem.

One of the interesting thing about this investigation, scheduled to take place on Thursday March 22, 2007, is that Countrywide Financial (CFC) has been named as one of top five originators of this loan. Others to be investigated include HSBC (HSBA), New Century (NEWC.PK), General Electric Co (GE), Washington Mutual (WM), and First Franklin Fiancial. All along, Countrywide (CFC) has been vehemently adamant about their subprime loan porfolio comprising only 7% of their entire loans originated. Yet, when the SEC is investigating the top 5 originators of this type of mortgage, Countrywide is at the forefront (CFC). Additionally, it is interesting to see such wide spectrum of unexpected players actually emerging as the top originators of subprime mortgage, namely, General Electric Co (GE). This is significant because the subprime issue is not only relegated to the subprime lenders but is inclusive of many companies that are not in theory or by testimony a subprime lender.

Countrywide (CFC) continues to lose credibility with me and quite possibly with the investment community. All along Countrywide (CFC) has affirmed that they are not a major player in subprime lending business. Isn't it ironic how they get invited as the top 5 subprime lenders in the country? Perhaps Countrywide is not being too truthful about this? This is not surprising based on their recent behavior from insider selling to massive PR efforts (think CNBC). I have written about the issues with Countrywide's Debt to Equity ratio as an a means to counter the relatively attractive PE ratios, PEG ratios, and Price to Sales ratio. And yet, when you dig deep into this company, just even a cursory look at the company's fundamentals will tell you that this company will soon head into trouble as long as they keep lying to the public about their situation.

One of the major issues to be considered at the SEC investigation on Thursday will be to see what extent these companies have acted in predatory fashion. Senator Dodd would be most interested in finding out how many poor, immigrants, and minorities comprised the entire loans originated from the beginning of the housing boom. Additionally, they will seek to gain knowledge on what actually precipitated the current subprime fiasco.

My thinking has always been that the companies that are most to blame are the publicly traded mortgage companies because of the pressure to show "growth" in revenues and EPS. Once the field got crowded and more "main stream" players such as Washington Mutual and Countrywide entered the fray, the pressure to originate subprime loans on riskier population took hold. From there, the "liar loans" or no-doc loans carrying low teaser rates were used to pad up earnings and Wall Street's favor. Once the game was apparent that it would end soon, many of these lenders resorted to hiding behing hiking dividends and increasing buy backs. CFC chose to go the way of buybacks and increased dividends. While these were attractive to the untrained eye, these buy backs were supported by additional debt. This should lead to two main question by the SEC. How much of the growth was garnered by creative accounting and how much loans originated broke fair lending practices? Moreover, hopefully, once the dust settles, it will be apparent that there will be two losers in this game. One is the subprime and prime ALT-A mortgage holders and the second is the retail investors who will be left holding the bag based on misinformation.

One needs to only look at today's Morning Star's Five Star Stocks. They named Countrywide (CFC) as such company. They believe that the PE valuation as well as PEG is reasonable and expect this "high quality" stock to survive the subprime melt down and sees this company as attractive for the long term. "Long Term" is an interesting term coined by Wall Street and its allied industry to screw hard working Americans to prop up the stock while the parties in the know can liquidate their shares. I also mentioned in yesterday's blog about the dangers of following PE and PEG ratio as a measure of "value" in companies wihtout considering the DEBT TO EQUITY ratio.

What matters most is that Countrywide has been named as a participant on SEC's investigation. I don't know how much truth will be revealed under oath. Will CFC finally face the music and confess that all is not well in the mortgage industry, and, especially in the interest of all that is good (or that is left that is good in this world) prevent further deterioration of shareholder value at the price of insider greed. I doubt it. I am sure that they will deny that anything is really wrong. I doubt it because while they are screwing the shareholders of wealth, they are getting rich. There is nothing that a well crafted defined benefits plan or children's trusts or Limited Partnerships that can save the souls of these people whose main purpose is greed. But like all things, things will end in tears, with half assed apologies in front of juries that will pass judgement, and the shareholders will be the only ones who will truly get hurt because of CFC's arrogance.