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Ben Hallman

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This Dead Octopus Would Make A Better Investment Adviser Than Our Living Finance Reporter

Posted: 09/12/2012 9:13 am

There once lived a German octopus named Paul who, unlike most cephalopods, was for a brief time quite famous.

Paul's special skill was prognostication. During the 2010 World Cup, he time and again chose to eat a mussel from a box painted with the flag of the winning soccer team over a mussel associated with the losing team. He even picked Spain to defeat the Netherlands in the final match, and though no one stayed awake to the end to verify the result, it is assumed that Paul was, for the eighth time in a row, correct.

Paul is dead now, probably poisoned by all that paint. But I thought about him recently as I read a letter from the Securities and Exchange Commission that reminded me, once again, of my special skill: making wildly speculative and ultimately disastrous investment decisions.

It's confession time: I cover housing and finance for The Huffington Post. Yet on Nov. 21, 2007, I bought into the company identified more than any other with the subprime bubble and subsequent crash. I bought a $1,037 chunk of Countrywide Financial.

Suffice it to say, my decision making here is not a top-of-resume line item. Nor, unfortunately, is it an anomaly. Until I swore off trading shares of individual companies several years ago, I made all the mistakes of a rookie investor. I bought low, sold high and pulled the trigger on trades based on no more than a gut instinct and two minutes of Internet research.

Usually, I found it pretty easy to rationalize my haplessness. I covered legal affairs at the time, not Wall Street, and had no more insight than the average investor into the companies on which I would gamble. Most of my bets were for sums of less than $1,000. And I figured Wall Street trading robots would enslave us all long before I retired anyway.

But the Countrywide trade has haunted me -- not so much for the money I lost, but because I've spent the past four years writing about the failed bet's implications.

For those with short memories, Countrywide was once the largest originator of home loans in the United States. Countrywide specialized, especially in its later days, in selling subprime mortgages with high interest rates to anyone willing, you know, to promise that they had a job and an income level sufficient to pay the loan back. The lender was also not afraid to get its hands dirty, according to whistleblowers. In the drive to crank out even more home loans, employees used scissors, tape and White-Out to create fake bank statements and other phony paperwork.

Most of these mortgages were bought by Wall Street, crammed into mortgage bonds like apple-sausage stuffing into a turkey, and then sold to investors such as big pension funds. At least it did until the whole thing blew up, nearly killing the American economy.

At the time, of course, I didn't know any of this. By the end of 2007 it was evident that there had been a subprime bubble, and housing prices were beginning to fall. But a full-fledged financial panic seemed like something guys in jerk-motion old newsreels did. So I purchased 105 shares at $9.83, a price down sharply from $45.03 nine months before. A gamble, sure, but it wasn't like the mortgage giant was going to collapse like a 12-story tower made of dog turds in a heavy rain or anything, right?

Fortunately for me, I wasn't the only one living on a cloud of delusion. I would have lost every dime of my investment if not for an even more foolish bet two months later by Bank of America, which swooped in as the sky was falling and paid $2.5 billion for the company.

"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Ken Lewis, the now-deposed former CEO of Bank of America, said at the time. [emphasis mine]

So what was to be the role of the man behind the curtain, former Countrywide chief executive Angelo Mozilo, at Bank of America?

"Angelo has told me that he will do anything that we want him to do," Lewis said. "I would guess that he'll want to go have some fun."

And oh what fun he had! Over the next few years Mozilo landed on such distinguished lists as Time's "25 People to Blame for the Financial Crisis," successfully deflected a criminal investigation, and settled a SEC lawsuit for $67.5 million, the largest fine ever paid by a corporate executive.

The Countrywide bet has cost Bank of America an estimated $40 billion in mortgage losses and legal bills, according to the Wall Street Journal. Forbes estimated the bill could be $53 billion. Tony Plath, a banking and finance professor at the University of North Carolina at Charlotte told the Journal that it was "the worst deal in the history of American finance."

For me it was simply the worst decision in a history of lousy investment decisions: I had never even seen an outlet of the mall punk teen clothing store Hot Topic when I took a losing gamble on it. I sold off my shares in a network security company called Check Point shortly before it doubled in value. A $3,000 investment in an environmentally-friendly fund, called Winslow Green Growth, was worth half what I paid just six months later.

I finally exited my Countrywide bet in 2009, when I sold the 19 shares of converted Bank of America stock for $17.58 a share. -- or $327.01. I had lost 68 percent of my investment, or about $700. (Bank of America is now trading at under $9 a share, so my decision to dump it when I did, at least, was a lucky one).

It was also something of a "Scared Straight!" moment. I went ahead and sold off the remaining shares of stock I had accumulated in a handful of other companies and closed my brokerage account.

The coda to this cautionary tale involves that letter I received from the SEC. Turns out, I may not be just an idiot investor after all -- but also a victim.

The SEC had accused Mozilo and two other Countrywide investors of dumping stock as they knew the company was falling apart, all the while telling investors (like me, not that I was paying attention) that everything was hunky-dory. They settled the case and the SEC put the money, $48 million, in a pool called a fair fund.

Created in 2002 as part of the Sarbanes-Oxley financial reform legislation, fair funds are pools of money recovered through SEC lawsuits against corporate executives accused of fraud. All told, SEC fair funds have paid out $9.6 billion in 270 cases. The record payout came through a $843 million settlement with AIG in 2009.

Danny Wilson, who works in the distribution office at the SEC, told me that there is no way to predict in advance how much I or any other investor might recover from the Countrywide fair fund. He said in some past cases investors have received 100 percent of what they lost, though that is rare.

I get that smart investors may have made decisions based on lies Mozilo told about the soundness of his company, even if I don't fall into that category. But it seems as though people who bought into the bubble that Countrywide helped inflate through fraud, and have since lost their homes to foreclosure or are deeply underwater on their loans, have suffered the most harm. And yet they get nothing.

Nor do I think a financial penalty alone is sufficient for someone like Mozilo, who has retained most of his fabulous wealth even as the fallout from the crisis he helped create continues to devastate families in places like places like Atlanta and Ft. Myers, Fla.

I think a national apology tour is in order, perhaps accompanied by a dead octopus or two. This time, at least, we could smell him coming.

 
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