Countrywide Financial: The Subprime Meltdown Case Study

Countrywide Financial: The Subprime Meltdown Case Study

Randolph Petrie

Pensacola State College

MAN 3063 Ethics and Values

Mr. John S. Bishop, Jr., MBA

20 January, 2013

Countrywide Financial: The Subprime Meltdown Case

1. Presentation of the Facts Surrounding the Case

This is a case study of the subprime meltdown with an emphasis on Countrywide Financial's ethical failures. We will look at the ethical issues, their cause, and possible action that could have prevented them. The time line of events begins in the late sixties to after the turn of the century. Countrywide Financial is an institution for the lending of money in the form of mortgages and other financial instruments such as subprime loans. During Countrywide's peak profit years, the majority of the profits were generated by subprime loans. The subprime loans high profit paid out high commissions to the deal closer thus giving high incentives to sell more subprime loans. Countrywide allowed itself to sell more and more of these risky derivatives until they were an overwhelming part of Countrywide's total portfolio. After the market was fairly saturated with these subprime instruments, the agents loosened their standards in order to gain a great pool of customers. By lowering their standard customer that normally would not qualify for any type of mortgage were being lent to in high volumes generating high short term profit and high commissions. The managers and agents receiving these high commissions were concerned only in themselves and not the company.

With the downturn of the economy and the housing market, Countrywide's loans were mostly made up of subprime loans with high risk factor. High interest rates of the variable interest loans went into effect, and the payees started defaulting. As the house of cards started to fall, the CEO set himself up with a sweetheart golden parachute deal and took all of his stock options to his own benefit and not the stakeholders. The Bank of America bought Countrywide at a discount but had the ethical issues to handle.

2. Identification of Key Issues

The ethical issues throughout the life of Countrywide are a reflection of the corporate culture of its creator. That is to say, paying commission to people for making loans may sound like a proper way of doing business, but it leaves out an important part. "Is the loan good for the company?" Hindsight shows us, the answer is," No." During the whole time of Countrywide's existence, the shakers and movers of the company were only concerned with their benefits and not the good of the company. The stakeholders assume that the managers and their agents will work for the betterment and increase the value of the company. This was not the case in Countrywide. The managers and their agents worked only for their own financial benefits through a bonus and commission system of rewards. These rewards were not linked to the betterment or long term value to the company. By investing more and more of the company's resources in high risk loan, management increased the risk to the stakeholders to levels that could not be sustained when the economic downturn hit the financial markets. This is the list of the ethical issues involved:

* Having a corporate culture that does not promote the value of the company.

* Management allows the company to take on to much risk.

* Company's agents misrepresent qualification of loan customers.

* Agents are on a commission bonus program.

* Management did not supervisor the agents.

* Greed

* Lowered loan standards and misrepresented the risk to the stakeholders.

* Bank of American should have investigated Countrywide thoroughly

The lure of easy money, lack of prudent supervision, and greed led to the downfall of Countrywide.

3. Possible Alternative Courses of Action

What could or should have been done is what will be listed here for review. It is tempting to just say Countrywide just tried to grow too fast, but a lie of that magnitude cannot survive the test of hindsight. The success of the years of high profit and bonuses put all caution to the wind, and management and their agents thought nothing could stop them from always increasing the