| Bush's tax panel calls for sweeping reforms By Christopher Swann in Washington Published: October 18 2005 19:05 | Last updated: October 18 2005 19:05  With his second-term domestic agenda stalled, President George W. Bush has been casting about for new initiatives. The panel he appointed to recommend simplifying the labyrinthine US tax code handed him a huge one on Tuesday, recommending sweeping changes to the US taxation system. The panel intends to call for the capping of tax deductions on interest for home mortgages and employer-sponsored healthcare, eliminating the deduction for state and local taxes, and overhauling tax reductions for popular retirement savings schemes. In exchange, it will recommend abolishing taxation of dividends, cutting personal and corporate income tax rates, and ending the worldwide taxation of US corporate earnings. The most controversial of its recommendations is likely to be reducing the mortgage interest tax deduction, which allows taxpayers to write off their annual interest payments on home loans of up to $1m. Even before the panel's final report has been published,the powerful home-building industry has been lobbying to kill the proposal. The industry might not need to work too hard. Fresh from his defeat over social security, many doubt Mr Bush has the inclination or ability to push through such a contentious reform. When he launched the commission last January, Mr Bush cautioned the nine-member panel to “recognise the importance of home ownership” in US society. But faced with the requirement that any changes to tax policy should be revenue-neutral, the economic logic of the proposal is compelling. Each year the loophole costs about $75bn in lost tax revenue, making it the second most expensive deduction on the tax code behind employer-provided healthcare contributions, at $125bn a year, which the panel also suggested restricting. The federal government desperately needs new measures to raise revenues if, as the panel suggests, Congress is to abolish the Alternative Minimum Tax a parallel tax for the wealthy that is expected to yield about $1,300bn over the next decade. Many economists argue that the loophole does little to promote home ownership as about 55 per cent of the benefit goes to households with incomes of more than $100,000 a year that is, to those who would own homes regardless of a tax incentive. Households earning less than $40,000 a year receive just 5 per cent of the tax benefit. “What you end up with is a tax system that encourages bigger houses with more bathrooms, rather than more home-ownership,” says Wayne Brough, an economist at the Freedom Works. There is even evidence that the tax break locks poorer Americans out of the market by pushing up prices. Ironically, the National Association of Homebuilders, a strong supporter of the tax deduction, concurs with this view. Curbing the tax benefit would cause house prices to fall, it says. “We are not just talking about slowing the growth of house prices,” says Jerry Howard, chief executive of the association. “We are taking about house prices diminishing.” That argument is likely to prove politically decisive. When the tax break last came under threat in 1995, the National Association of Realtors claimed that reform would cause house prices to fall by 15 per cent, wiping $1,700bn off homeowners' equity. If the deduction is threatened again, the housing industry would most likely produce even more shocking figures. The NAHB says the housing market has already started to slow and any tinkering with the tax code would be extremely risky. “This is the primary source of wealth for most Americans, and many have been counting on the value of housing for their retirement,” says Mr Howard. The tax panel, acutely aware of such concerns, has suggested phasing in reform over several years. Even so, fear is likely to trump economic rationality, argues Bill Archer, former chairman of the tax-writing Ways and Means Committee in the House of Representatives. “It is not so much a matter of whether it makes economic sense,” he says. “A lot of legislation that makes economic sense goes down because of fear. In this case the fear would be that any reform would have a chilling effect on the economy.” If anything, the housing industry is more powerful than it was in the 1990s. About 40 per cent of all new private-sector jobs over the past four years have been created in construction, mortgage-broking and other businesses related to housing. Paradoxically, the very ambition of the tax panel's recommendations might be the only hope for eliminating the mortgage deduction and other popular tax breaks. “If you are going to take away something from these higher-end homeowners, you need to give them something back,” says Mr Archer. |
Tuesday, October 18, 2005
Bush's tax panel calls for sweeping reforms
Uchumi rights issue: Now comes the hard part
Uchumi rights issue: Now comes the hard part
PETER MUNAITA says Uchumi will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer
Uchumi Supermarkets has moved from a problem of scarcity to one of plenty, with its Ksh1.2 billion ($16.2 million) rights issue being oversubscribed by Ksh69 million ($932,400).
The success of the rights issue puts the chain's chief executive, John Masterten-Smith, on the spot over how he deploys the newfound resources at his disposal to turn around the retail store, which is expected to announce a loss of Ksh900 million ($12.2 million) by the end of the month.
Besides operational issues, Mr Masterten-Smith will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer and are waiting to square their positions.
A meeting of the main shareholders is scheduled for next week to deliberate on how to balance the various interests laying a claim on the Ksh1.2 billion raised.
One issue already settled is that only Ksh47 million ($635,100) of a Ksh117 million ($1.6 million) shareholder loan will be converted into equity, leaving the company to repay the balance in full or negotiate new terms for the credit with the two shareholders – the Industrial and Commercial Development Corporation and its equity holding arm, ICDC Investments (ICDCI).
James Murigu, head of sponsor-ing broker Suntra Investment Bank, said the fate of the loan will depend on its compliance with the terms of other debt instruments held from the Kenya Commercial Bank and PTA Bank.
"The understanding is that the shareholders are in no hurry to liquidate the loan," Mr Murigu told The EastAfrican. ICDC, ICDCI and Kenya Wine Agencies Ltd held a total 52 per cent interest in the company before the rights issue, which has now fallen to just under 20 per cent.
ICDCI now has a 10.4 per cent stake in the company, Kwal 6.3 per cent and ICDC 3.2 per cent. The dilution was achieved by their relinquishing their rights, which were taken up by a "good mix" of retail and institutional investors.
Although a breakdown of the new shareholding structure will not be released until this week, it is understood that the rights issue was supported heavily by retail investors, debunking the myth that public share offers cannot succeed without the blessing of leading mutual trust funds.
The leading equity investment trusts and leading high-net worth individuals and corporates were reliably advised to "skip" the Uchumi rights issue and await the much anticipated initial public offer by the Kenya Electricity Generating Company (KenGen). The Privatisation Steering Committee has recruited transaction consultants who are now working on the modalities of the KenGen IPO.
Mr Masterten-Smith maintains that the management's role will be to implement strategic initiatives decided on before the rights issue, including reducing dead stock, franchising the brand across Kenya and ensuring real-time availability of products on the shelves.
Uchumi Supermarkets recently entered a product distribution partnership with Bidco Oil Refineries Ltd, which will restock specific branches from its Thika plant without necessarily passing through Uchumi's central distribution warehouse in Nairobi.
The partnership with Bidco Group and 10 other major suppliers is expected to free up billions of shillings tied up in stocks which can be used to restructure other operations and help turn around the cashstrapped supermarket chain, which closed 10 branches earlier this year and laid off 1,000 employees.
Mr Murigu said the success of the rights issue – marketed as a long-term investment – showed public confidence in Uchumi's strategic plan. "The rise in the share price from Ksh12 (16 US cents) per share to Ksh14.80 (20 US cents) this week confirms this," he said, projecting that the share would appreciate beyond the Ksh20 (27 US cents) per share mark.
However, analysts see the security coming under downward pressure as soon as the 120 million new shares start trading later this month, especially if the shares in retail investors' hands turn out to be substantial.
Mr Murigu does not rule out "a small dip in the short term" in line with trends with other rights issues, which caused a slide in the securities before the shares appreciated. This was what happened with the share splits effected by Kenol and East African Breweries
PETER MUNAITA says Uchumi will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer
Uchumi Supermarkets has moved from a problem of scarcity to one of plenty, with its Ksh1.2 billion ($16.2 million) rights issue being oversubscribed by Ksh69 million ($932,400).
The success of the rights issue puts the chain's chief executive, John Masterten-Smith, on the spot over how he deploys the newfound resources at his disposal to turn around the retail store, which is expected to announce a loss of Ksh900 million ($12.2 million) by the end of the month.
Besides operational issues, Mr Masterten-Smith will come under pressure from those creditors, among them suppliers and lenders, who declined the debt-for-equity deal that was on offer and are waiting to square their positions.
A meeting of the main shareholders is scheduled for next week to deliberate on how to balance the various interests laying a claim on the Ksh1.2 billion raised.
One issue already settled is that only Ksh47 million ($635,100) of a Ksh117 million ($1.6 million) shareholder loan will be converted into equity, leaving the company to repay the balance in full or negotiate new terms for the credit with the two shareholders – the Industrial and Commercial Development Corporation and its equity holding arm, ICDC Investments (ICDCI).
James Murigu, head of sponsor-ing broker Suntra Investment Bank, said the fate of the loan will depend on its compliance with the terms of other debt instruments held from the Kenya Commercial Bank and PTA Bank.
"The understanding is that the shareholders are in no hurry to liquidate the loan," Mr Murigu told The EastAfrican. ICDC, ICDCI and Kenya Wine Agencies Ltd held a total 52 per cent interest in the company before the rights issue, which has now fallen to just under 20 per cent.
ICDCI now has a 10.4 per cent stake in the company, Kwal 6.3 per cent and ICDC 3.2 per cent. The dilution was achieved by their relinquishing their rights, which were taken up by a "good mix" of retail and institutional investors.
Although a breakdown of the new shareholding structure will not be released until this week, it is understood that the rights issue was supported heavily by retail investors, debunking the myth that public share offers cannot succeed without the blessing of leading mutual trust funds.
The leading equity investment trusts and leading high-net worth individuals and corporates were reliably advised to "skip" the Uchumi rights issue and await the much anticipated initial public offer by the Kenya Electricity Generating Company (KenGen). The Privatisation Steering Committee has recruited transaction consultants who are now working on the modalities of the KenGen IPO.
Mr Masterten-Smith maintains that the management's role will be to implement strategic initiatives decided on before the rights issue, including reducing dead stock, franchising the brand across Kenya and ensuring real-time availability of products on the shelves.
Uchumi Supermarkets recently entered a product distribution partnership with Bidco Oil Refineries Ltd, which will restock specific branches from its Thika plant without necessarily passing through Uchumi's central distribution warehouse in Nairobi.
The partnership with Bidco Group and 10 other major suppliers is expected to free up billions of shillings tied up in stocks which can be used to restructure other operations and help turn around the cashstrapped supermarket chain, which closed 10 branches earlier this year and laid off 1,000 employees.
Mr Murigu said the success of the rights issue – marketed as a long-term investment – showed public confidence in Uchumi's strategic plan. "The rise in the share price from Ksh12 (16 US cents) per share to Ksh14.80 (20 US cents) this week confirms this," he said, projecting that the share would appreciate beyond the Ksh20 (27 US cents) per share mark.
However, analysts see the security coming under downward pressure as soon as the 120 million new shares start trading later this month, especially if the shares in retail investors' hands turn out to be substantial.
Mr Murigu does not rule out "a small dip in the short term" in line with trends with other rights issues, which caused a slide in the securities before the shares appreciated. This was what happened with the share splits effected by Kenol and East African Breweries
Monday, October 17, 2005
Countrywide Mortgage
October 16, 2005
The Mortgage Maker vs. the World
By JEFF BAILEY
SIMI VALLEY, Calif.
A touch of resentment - based on income, education, social class - motivates countless ambitious people, though few will admit to it once they become successful.
An exception is Angelo R. Mozilo, a founder and chief executive of the Countrywide Financial Corporation, a company that has soared from obscurity to become the nation's No. 1 mortgage lender - and, in the process, produced a personal fortune for Mr. Mozilo of about half a billion dollars. This year alone, his compensation is expected to reach $100 million.
Modest origins - a butcher's son from the Bronx who worked his way through Fordham University - drove Mr. Mozilo to push Countrywide past the mortgage businesses of far larger companies, including Citigroup, Wells Fargo and Washington Mutual. He readily admits to having a chip on his shoulder, a source of motivation that he has studied, channeled and sought in others, building a company that, too, is an overachiever.
The chip also contributes to Mr. Mozilo's feeling that he is entitled to his hefty pay package.
"Nobody called me when I was making nothing for years and years and said, 'Can I help?' " Mr. Mozilo said in an interview at a Countrywide loan processing campus that sprawls over a hillside in this Los Angeles exurb, across the road from a garbage dump. His pay, he added, "is based on my performance."
That performance has been impressive, particularly during the recent housing boom. Countrywide's loan volume quintupled over the last five years, and its profit grew even faster, to $2.2 billion last year. But the history of the mortgage industry is full of nasty surprises that sank or slowed once-strong companies - interest rate swings and frenetic refinancing make the business volatile and risky. That weighs on Countrywide's stock, which trades at a discount to other financial firms.
On the topic of being underappreciated, Mr. Mozilo doesn't require much encouragement. "I run into these guys on Wall Street all the time who think they're something special because they went to Ivy League schools," he said. For companies like his, "We're always underestimated. And we still are. I am. I must say, it bothered me when I was younger - their snobbery and their looking down on us."
A lithe, little guy with a jutting jaw, Mr. Mozilo looks like he has faced off against his share of bullies. Today, he dresses elaborately, as if to remind them of who came out on top. A perfectly folded hankie peeks out from the breast pocket of his blue suit; underneath is a crisp banker's shirt in blue with a white collar, and weighty cufflinks with the Countrywide logo. All is set off against a deep tan.
In an interview, he didn't wait for a question, sallying forth on his own. "Who I am: I was a messenger boy for a mortgage company in Manhattan," he began. "I was a 14-year-old boy. The people in this company know I did what they're doing. Getting kicked out of real estate offices - the 40th mortgage guy to walk through the door - that's the business. It has been a source of strength to me as a leader. Fifty-two years I've been doing this."
Mr. Mozilo is 66 and expects to retire at 68. He has recruited others with chips on their own shoulders to carry on at Countrywide after he leaves, and has set them loose on the staid banking industry with something to prove. His top two lieutenants graduated from California State University, Northridge, a decidedly un-Ivy League institution not far from here. Another comes from California State University, Long Beach. All told, the company now employs more than 50,000 people.
In truth, of course, graduates of less-than-elite colleges are well represented at many large financial institutions. At Wells Fargo, the big San Francisco-based bank, for instance, Richard M. Kovacevich, chief executive and a Stanford man, in August named as his No. 2 and apparent successor John G. Stumpf, who has an accounting degree from St. Cloud State University in Minnesota.
What sets Countrywide apart is the us-versus-them feeling that Mr. Mozilo draws from his life story and his ability to tap into the same feelings in others. Indeed, many of his employees are drawn to what he sells as a free-wheeling meritocracy, and they bring the chips on their shoulders with them.
"I did," said Brian Hale, who left Wells Fargo four years ago. A Countrywide managing director in charge of retail loan production, he is a graduate of the State University of New York at Plattsburgh. "In many organizations I compete with, that would disqualify me for the job I have at Countrywide," Mr. Hale said of his schooling. True or not, it motivates him.
"The key people I depend upon - that chip is so ingrained," Mr. Mozilo said. "They're sort of my apostles in that regard."
The success of Countrywide might cause most executives to let up a bit. The stock has been among the best performers over the last 20 years. Profits exceed $2 billion a year. And, pulling further away from competitors, Countrywide expects to originate between $390 billion and $480 billion in mortgages this year, 14 to 15 percent of the nation's total. Its costs are among the lowest in the industry.
Countrywide lends directly to consumers and also buys loans from other lenders and from loan brokers. It packages most of the loans up and resells them at a profit.
Because it is primarily a mortgage lender, however, Countrywide's profits and stock price are vulnerable to interest rate swings, and thus its shares trade for about nine times its per-share earnings, a relatively low multiple. Its nearest competitor in the mortgage business, Wells Fargo, is a diversified bank that is less vulnerable to shifting rates. Its stock trades at about 14 times its earnings.
Mr. Mozilo bought a bank in 1991 - its assets doubled over the last year, to $91 billion - and Countrywide is hanging onto more mortgages, producing a stream of income to smooth the ups and downs of the refinancing market "so we can get a better multiple for the shareholders," Mr. Mozilo said. "Will we? I don't know. To this day, we are perceived as a proxy on interest rates."
While he is sanguine about the stock price, Mr. Mozilo remains volatile about so much else. Particularly irksome are calls by Alan Greenspan, the Federal Reserve chairman, to shrink Fannie Mae and Freddie Mac, the quasi-government institutions that buy huge numbers of mortgages from financial institutions, notably from Countrywide.
"Fannie and Freddie are a threat to his banks," Mr. Mozilo said of Mr. Greenspan, whose agency regulates big bank holding companies. By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. "If it wasn't for them," he said of Fannie and Freddie, "Wells knows they'd have us."
He can also be irked by his employees. Walking through a hallway past a worker who is away from his desk and talking on a cellphone, Mr. Mozilo said, "I hate that." The hallways are remarkably empty; workers are in their cubicles, which all have low partitions, so employees can be easily seen. Mr. Mozilo pays less attention to the cubicles' square footage. "Whether it's smaller or larger, they adapt, like fish to a fish tank," Mr. Mozilo said.
As Anne McCallion, the director of finance, observed, "Countrywide is not a paternalistic organization." Indeed, the company agreed to pay $30 million to settle a lawsuit filed on behalf of employees who say they weren't compensated for overtime.
The suit and other labor issues are one reason the company now prefers to add workers in Texas and other states with labor laws that are friendlier to employers. Standing beside Mr. Mozilo, Steve Bailey, the chief of loan administration, noted that Countrywide has 17,000 workers in California. "We should be out of California," he said.
Mr. Mozilo and a partner founded Countrywide in 1969, intent on building the first national mortgage company. After a $3 million stock offering failed, they raised $450,000. By 1983, with more of a track record, they raised $11 million by selling stock, but the deal limited Mr. Mozilo to only small raises to his salary, which was $345,000. The butcher's son had grown accustomed to a good living. "I had five kids," he said. "It was really hard."
As the 1980's wore on, the savings and loan crisis cleared away many of Countrywide's bigger rivals. And the rise of Fannie Mae and Freddie Mac allowed Countrywide and others to grow rapidly by selling their loans at a profit and recycling the capital into making new loans. In the refinancing boom of 1993, "we really came into our own," Mr. Mozilo said.
When boom turned to bust, Countrywide and others laid off workers. And with the likes of Wells Fargo, Citigroup, General Motors Acceptance and other larger companies piling into the national mortgage market, Countrywide briefly considered a takeover offer from Lloyd's Bank about five years ago. But the buyer backed away, Mr. Mozilo said, punctuating the story with, "Thank God."
Around that time, Countrywide invited Eric G. Flamholtz, a consultant and a management professor at the University of California, Los Angeles, to address a strategic planning retreat. When we met, Mr. Flamholtz said, Mr. Mozilo "gave me a limp handshake." But "when he heard I was from Brooklyn, he perked up."
The professor had a wacky notion that the mortgage market, where no lender had more than a 5 percent share, would inevitably and rapidly consolidate, leaving as few as three big players, one of them clearly dominant. He also said pricing wouldn't dictate the winner. "You win with infrastructure," he said.
THE prospect of a chance to dominate competitors seemed to reinvigorate Mr. Mozilo. Countrywide invested heavily in technology to lower its costs and quicken its service, then went on to announce a goal to capture 30 percent of the mortgage market. It accelerated the building of a network of 795 local offices to cater to real estate agents and home builders, who refer home buyers to mortgage companies. That network distinguishes Countrywide from competitors that rely more on phone banks. Can Countrywide respond more quickly to homebuilders and homebuyers trying to seal deals? "Even if I can't," said Mr. Hale, who runs retail loan production, "the perception of the Realtor and builder is I can."
The timing was great. Low interest rates led to a huge refinancing boom, which peaked in 2003. Soaring home prices also led consumers to stray in huge numbers from 30-year fixed-rate mortgages to adjustable-rate loans, interest-only loans and, more recently, "pay-option" loans that allow payments for a period of time that don't even cover the owed interest, resulting in a rising loan balance, or negative amortization. These mortgages tend to be more profitable than old-style loans. Nonprime loans, those made to less-creditworthy borrowers, brought it nearly four times as big a gross profit - 3.64 percent of the loan amount compared with 0.93 percent for prime mortgages - last year.
But as profits climbed, so did the complexity, and potentially the risk, of Countrywide's operation. Adjustable-rate loans accounted for 51 percent of Countrywide's mortgages last year, up from 14 percent in 2002. In this year's second quarter, pay-option loans, the ones that allow negative amortization, were 21 percent of Countrywide's total, versus just 3 percent a year earlier.
That volume of such loans has never been tested in a sharply rising interest-rate environment, a situation feared by some though not yet on the horizon. While Countrywide sells most of its loans, passing the credit risk to others, it had $15 billion worth of pay-option adjustable rate mortgages on its own books at the end of June, and almost one in five of them had experienced negative amortization. If delinquencies on those loans or others rise, Countrywide's ability to sell loans in the future could be damaged. For this reason, Wells Fargo has so far shied away from pay-option mortgages.
Others aren't as reluctant as Wells Fargo, and fierce competition - industry overcapacity, really - has this year squeezed profit margins sharply. In the second quarter, Countrywide's gross profit on loans sold plunged to 1.02 percent of the loan amount from 1.64 percent in the first quarter. In a Securities and Exchange Commission filing for the quarter, the company said, "We believe that industry consolidation should lessen irrational pricing."
But is pricing irrational, or is it merely now the norm in a highly efficient industry, one that Countrywide helped develop and one that delivers an abundance of capital to consumers who shop ever more wisely for the best deal? Asked if the thinning of margins will stop, Mr. Mozilo said, "It's going to ease for the balance of the year." But over the long term, "I don't think so," he added.
Countrywide, like other big financial companies, is diversifying, selling insurance and home equity loans, all in an effort to keep growing and boost profits.
MR. MOZILO, after pocketing about $70 million last year from salary, bonus and gains on exercising stock options, will probably hit $100 million in pay for 2005. He has already exercised more than three million options, selling the shares, this year. His cash bonus, $17.3 million last year, was the biggest among chief executives of all companies in the Standard & Poor's 500-stock index, according to Paul Hodgson of the Corporate Library, a corporate governance organization.
With huge slugs of options in recent years, and Countrywide's surging stock price "over the last three years, he has had a $500 million jump in worth," said Brian Foley, an independent compensation consultant in White Plains. With shareholders benefiting so, "you've got to give him his due," Mr. Foley said, but added, "When is enough enough?"
Countrywide's lead director and chairman of the board's compensation committee, Michael E. Dougherty, chairman of Dougherty Financial Group, a Minneapolis investment company, said of Mr. Mozilo: "He deserves every penny. He has a passion that only a founder has. I get e-mails time-dated from him at 2 a.m."
That's high praise, but Mr. Mozilo is resigned to being underappreciated. When he meets a stranger on the golf course he no longer calls himself a mortgage guy. "Now I say I run a financial services business," he said. "I don't know why. It makes me feel better. I guess status."
Before, he added, when he said he was in the mortgage business, "because of the way I look they say, 'Second mortgages? Sub-prime?' "
The Mortgage Maker vs. the World
By JEFF BAILEY
SIMI VALLEY, Calif.
A touch of resentment - based on income, education, social class - motivates countless ambitious people, though few will admit to it once they become successful.
An exception is Angelo R. Mozilo, a founder and chief executive of the Countrywide Financial Corporation, a company that has soared from obscurity to become the nation's No. 1 mortgage lender - and, in the process, produced a personal fortune for Mr. Mozilo of about half a billion dollars. This year alone, his compensation is expected to reach $100 million.
Modest origins - a butcher's son from the Bronx who worked his way through Fordham University - drove Mr. Mozilo to push Countrywide past the mortgage businesses of far larger companies, including Citigroup, Wells Fargo and Washington Mutual. He readily admits to having a chip on his shoulder, a source of motivation that he has studied, channeled and sought in others, building a company that, too, is an overachiever.
The chip also contributes to Mr. Mozilo's feeling that he is entitled to his hefty pay package.
"Nobody called me when I was making nothing for years and years and said, 'Can I help?' " Mr. Mozilo said in an interview at a Countrywide loan processing campus that sprawls over a hillside in this Los Angeles exurb, across the road from a garbage dump. His pay, he added, "is based on my performance."
That performance has been impressive, particularly during the recent housing boom. Countrywide's loan volume quintupled over the last five years, and its profit grew even faster, to $2.2 billion last year. But the history of the mortgage industry is full of nasty surprises that sank or slowed once-strong companies - interest rate swings and frenetic refinancing make the business volatile and risky. That weighs on Countrywide's stock, which trades at a discount to other financial firms.
On the topic of being underappreciated, Mr. Mozilo doesn't require much encouragement. "I run into these guys on Wall Street all the time who think they're something special because they went to Ivy League schools," he said. For companies like his, "We're always underestimated. And we still are. I am. I must say, it bothered me when I was younger - their snobbery and their looking down on us."
A lithe, little guy with a jutting jaw, Mr. Mozilo looks like he has faced off against his share of bullies. Today, he dresses elaborately, as if to remind them of who came out on top. A perfectly folded hankie peeks out from the breast pocket of his blue suit; underneath is a crisp banker's shirt in blue with a white collar, and weighty cufflinks with the Countrywide logo. All is set off against a deep tan.
In an interview, he didn't wait for a question, sallying forth on his own. "Who I am: I was a messenger boy for a mortgage company in Manhattan," he began. "I was a 14-year-old boy. The people in this company know I did what they're doing. Getting kicked out of real estate offices - the 40th mortgage guy to walk through the door - that's the business. It has been a source of strength to me as a leader. Fifty-two years I've been doing this."
Mr. Mozilo is 66 and expects to retire at 68. He has recruited others with chips on their own shoulders to carry on at Countrywide after he leaves, and has set them loose on the staid banking industry with something to prove. His top two lieutenants graduated from California State University, Northridge, a decidedly un-Ivy League institution not far from here. Another comes from California State University, Long Beach. All told, the company now employs more than 50,000 people.
In truth, of course, graduates of less-than-elite colleges are well represented at many large financial institutions. At Wells Fargo, the big San Francisco-based bank, for instance, Richard M. Kovacevich, chief executive and a Stanford man, in August named as his No. 2 and apparent successor John G. Stumpf, who has an accounting degree from St. Cloud State University in Minnesota.
What sets Countrywide apart is the us-versus-them feeling that Mr. Mozilo draws from his life story and his ability to tap into the same feelings in others. Indeed, many of his employees are drawn to what he sells as a free-wheeling meritocracy, and they bring the chips on their shoulders with them.
"I did," said Brian Hale, who left Wells Fargo four years ago. A Countrywide managing director in charge of retail loan production, he is a graduate of the State University of New York at Plattsburgh. "In many organizations I compete with, that would disqualify me for the job I have at Countrywide," Mr. Hale said of his schooling. True or not, it motivates him.
"The key people I depend upon - that chip is so ingrained," Mr. Mozilo said. "They're sort of my apostles in that regard."
The success of Countrywide might cause most executives to let up a bit. The stock has been among the best performers over the last 20 years. Profits exceed $2 billion a year. And, pulling further away from competitors, Countrywide expects to originate between $390 billion and $480 billion in mortgages this year, 14 to 15 percent of the nation's total. Its costs are among the lowest in the industry.
Countrywide lends directly to consumers and also buys loans from other lenders and from loan brokers. It packages most of the loans up and resells them at a profit.
Because it is primarily a mortgage lender, however, Countrywide's profits and stock price are vulnerable to interest rate swings, and thus its shares trade for about nine times its per-share earnings, a relatively low multiple. Its nearest competitor in the mortgage business, Wells Fargo, is a diversified bank that is less vulnerable to shifting rates. Its stock trades at about 14 times its earnings.
Mr. Mozilo bought a bank in 1991 - its assets doubled over the last year, to $91 billion - and Countrywide is hanging onto more mortgages, producing a stream of income to smooth the ups and downs of the refinancing market "so we can get a better multiple for the shareholders," Mr. Mozilo said. "Will we? I don't know. To this day, we are perceived as a proxy on interest rates."
While he is sanguine about the stock price, Mr. Mozilo remains volatile about so much else. Particularly irksome are calls by Alan Greenspan, the Federal Reserve chairman, to shrink Fannie Mae and Freddie Mac, the quasi-government institutions that buy huge numbers of mortgages from financial institutions, notably from Countrywide.
"Fannie and Freddie are a threat to his banks," Mr. Mozilo said of Mr. Greenspan, whose agency regulates big bank holding companies. By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. "If it wasn't for them," he said of Fannie and Freddie, "Wells knows they'd have us."
He can also be irked by his employees. Walking through a hallway past a worker who is away from his desk and talking on a cellphone, Mr. Mozilo said, "I hate that." The hallways are remarkably empty; workers are in their cubicles, which all have low partitions, so employees can be easily seen. Mr. Mozilo pays less attention to the cubicles' square footage. "Whether it's smaller or larger, they adapt, like fish to a fish tank," Mr. Mozilo said.
As Anne McCallion, the director of finance, observed, "Countrywide is not a paternalistic organization." Indeed, the company agreed to pay $30 million to settle a lawsuit filed on behalf of employees who say they weren't compensated for overtime.
The suit and other labor issues are one reason the company now prefers to add workers in Texas and other states with labor laws that are friendlier to employers. Standing beside Mr. Mozilo, Steve Bailey, the chief of loan administration, noted that Countrywide has 17,000 workers in California. "We should be out of California," he said.
Mr. Mozilo and a partner founded Countrywide in 1969, intent on building the first national mortgage company. After a $3 million stock offering failed, they raised $450,000. By 1983, with more of a track record, they raised $11 million by selling stock, but the deal limited Mr. Mozilo to only small raises to his salary, which was $345,000. The butcher's son had grown accustomed to a good living. "I had five kids," he said. "It was really hard."
As the 1980's wore on, the savings and loan crisis cleared away many of Countrywide's bigger rivals. And the rise of Fannie Mae and Freddie Mac allowed Countrywide and others to grow rapidly by selling their loans at a profit and recycling the capital into making new loans. In the refinancing boom of 1993, "we really came into our own," Mr. Mozilo said.
When boom turned to bust, Countrywide and others laid off workers. And with the likes of Wells Fargo, Citigroup, General Motors Acceptance and other larger companies piling into the national mortgage market, Countrywide briefly considered a takeover offer from Lloyd's Bank about five years ago. But the buyer backed away, Mr. Mozilo said, punctuating the story with, "Thank God."
Around that time, Countrywide invited Eric G. Flamholtz, a consultant and a management professor at the University of California, Los Angeles, to address a strategic planning retreat. When we met, Mr. Flamholtz said, Mr. Mozilo "gave me a limp handshake." But "when he heard I was from Brooklyn, he perked up."
The professor had a wacky notion that the mortgage market, where no lender had more than a 5 percent share, would inevitably and rapidly consolidate, leaving as few as three big players, one of them clearly dominant. He also said pricing wouldn't dictate the winner. "You win with infrastructure," he said.
THE prospect of a chance to dominate competitors seemed to reinvigorate Mr. Mozilo. Countrywide invested heavily in technology to lower its costs and quicken its service, then went on to announce a goal to capture 30 percent of the mortgage market. It accelerated the building of a network of 795 local offices to cater to real estate agents and home builders, who refer home buyers to mortgage companies. That network distinguishes Countrywide from competitors that rely more on phone banks. Can Countrywide respond more quickly to homebuilders and homebuyers trying to seal deals? "Even if I can't," said Mr. Hale, who runs retail loan production, "the perception of the Realtor and builder is I can."
The timing was great. Low interest rates led to a huge refinancing boom, which peaked in 2003. Soaring home prices also led consumers to stray in huge numbers from 30-year fixed-rate mortgages to adjustable-rate loans, interest-only loans and, more recently, "pay-option" loans that allow payments for a period of time that don't even cover the owed interest, resulting in a rising loan balance, or negative amortization. These mortgages tend to be more profitable than old-style loans. Nonprime loans, those made to less-creditworthy borrowers, brought it nearly four times as big a gross profit - 3.64 percent of the loan amount compared with 0.93 percent for prime mortgages - last year.
But as profits climbed, so did the complexity, and potentially the risk, of Countrywide's operation. Adjustable-rate loans accounted for 51 percent of Countrywide's mortgages last year, up from 14 percent in 2002. In this year's second quarter, pay-option loans, the ones that allow negative amortization, were 21 percent of Countrywide's total, versus just 3 percent a year earlier.
That volume of such loans has never been tested in a sharply rising interest-rate environment, a situation feared by some though not yet on the horizon. While Countrywide sells most of its loans, passing the credit risk to others, it had $15 billion worth of pay-option adjustable rate mortgages on its own books at the end of June, and almost one in five of them had experienced negative amortization. If delinquencies on those loans or others rise, Countrywide's ability to sell loans in the future could be damaged. For this reason, Wells Fargo has so far shied away from pay-option mortgages.
Others aren't as reluctant as Wells Fargo, and fierce competition - industry overcapacity, really - has this year squeezed profit margins sharply. In the second quarter, Countrywide's gross profit on loans sold plunged to 1.02 percent of the loan amount from 1.64 percent in the first quarter. In a Securities and Exchange Commission filing for the quarter, the company said, "We believe that industry consolidation should lessen irrational pricing."
But is pricing irrational, or is it merely now the norm in a highly efficient industry, one that Countrywide helped develop and one that delivers an abundance of capital to consumers who shop ever more wisely for the best deal? Asked if the thinning of margins will stop, Mr. Mozilo said, "It's going to ease for the balance of the year." But over the long term, "I don't think so," he added.
Countrywide, like other big financial companies, is diversifying, selling insurance and home equity loans, all in an effort to keep growing and boost profits.
MR. MOZILO, after pocketing about $70 million last year from salary, bonus and gains on exercising stock options, will probably hit $100 million in pay for 2005. He has already exercised more than three million options, selling the shares, this year. His cash bonus, $17.3 million last year, was the biggest among chief executives of all companies in the Standard & Poor's 500-stock index, according to Paul Hodgson of the Corporate Library, a corporate governance organization.
With huge slugs of options in recent years, and Countrywide's surging stock price "over the last three years, he has had a $500 million jump in worth," said Brian Foley, an independent compensation consultant in White Plains. With shareholders benefiting so, "you've got to give him his due," Mr. Foley said, but added, "When is enough enough?"
Countrywide's lead director and chairman of the board's compensation committee, Michael E. Dougherty, chairman of Dougherty Financial Group, a Minneapolis investment company, said of Mr. Mozilo: "He deserves every penny. He has a passion that only a founder has. I get e-mails time-dated from him at 2 a.m."
That's high praise, but Mr. Mozilo is resigned to being underappreciated. When he meets a stranger on the golf course he no longer calls himself a mortgage guy. "Now I say I run a financial services business," he said. "I don't know why. It makes me feel better. I guess status."
Before, he added, when he said he was in the mortgage business, "because of the way I look they say, 'Second mortgages? Sub-prime?' "
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