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New York Times, February 3, 2008 column


The New York Times




February 3, 2008


Fair Game

Lenders Who Sold and Left

THE Federal Bureau of Investigation said last week that it had opened criminal investigations into 14 companies that played a part in the mortgage boom and bust. While it did not identify the companies on its dance card, the F.B.I. said they included mortgage brokers, lenders, and the Wall Street banks that packaged and sold the securities. Investigators are looking for accounting fraud and possible insider trading at the companies, an F.B.I. spokesman said.

The bureau certainly has its hands full. According to Mortgage Lender Implode-O-Meter, a Web site that chronicles developments in the mortgage crisis, 225 United States lenders have gone bye-bye since late 2006. Nabbing even a fraction of the mortgage captains — those who jumped ship and those who didn’t — could take eons. And many of them may be guilty of only greed, not a crime.

Still, it is a worthy effort as the losers and losses pile up. Winners, including the thousands of mortgage brokers who banked big bucks steering customers into subprime loans and the hundreds of mortgage traders and bankers at investment firms, should not be allowed to slink offstage without some recognition.

Consider John A. Johnston, former president of the Western division of the American Home Mortgage Investment Corporation. American Home Mortgage, which was the nation’s 10th-largest mortgage lender, made $60 billion in loans in 2006. When it filed for bankruptcy last August, more than 6,000 employees lost their jobs.

Mr. Johnston, however, was lucky enough to land at IndyMac, a mortgage lender and savings and loan in Pasadena, Calif. Helping to ease his transition was $7.33 million he collected from sales of American Home stock made in the fall of 2006. The average of $35 a share that Mr. Johnston received when he sold was very near the all-time closing high of $39.84 that American Home’s shares hit in 2005.

Financial filings show that Mr. Johnston’s sales took place on three days in early October 2006, just after the company closed the books on its third quarter. During that quarter, as the company detailed to investors on Nov. 9, 2006, American Home had sharply higher portfolio delinquencies and wrote down $16.8 million on its loan-servicing assets.

Mr. Johnston did not return a phone call seeking comment.

Then there is Edward F. Gotschall, a founder and vice-chairman of finance at New Century Financial, which collapsed last April. It was one of the first lenders to fail in the subprime bust.

Mr. Gotschall was paid well at New Century. Between 2003 and year-end 2005, he earned more than $1.5 million in salary and almost $7 million in bonuses. He also walked away with $24 million generated in stock sales during the latter half of 2006.

His selling rose significantly in late 2006 from his pattern in 2005. According to filings, he sold more than 600,000 shares between Aug. 15 and Nov. 21 of that year, up from 175,000 for all of 2005.

Mr. Gotschall received between $36.62 and $42.75 a share in his 2006 sales. More than half of his sales occurred before New Century disclosed its third-quarter 2006 results — net earnings fell almost in half from the same period in 2005 and loans delinquent at least 60 days rose to 5.95 percent from 4.61 percent in the second quarter of 2006.

And just two months after Mr. Gotschall sold 236,000 of the shares in late November 2006, New Century told investors that it was postponing its 2006 earnings conference call and would restate its financial statements for the fourth quarter and full year.

The stock fell 36 percent. Less than two months later, the lender filed for bankruptcy.

Mr. Gotschall did not return a phone call seeking comment. Both he and Mr. Johnston said in filings that their transactions were made under preplanned selling programs.

FINALLY, let’s not forget our friends at Novastar Financial, another anything-goes lender whose stock now trades at $1.12. Its home mortgage subsidiary filed for bankruptcy on Jan. 24 and it has let go all but 30 of its employees. (Novastar had 1,700 employees in 2005.)

Among those shown the door was Scott F. Hartman, Novastar’s co-founder and chief executive. Between 2003 and year-end 2006, Mr. Hartman earned $5.5 million in salary and bonuses at Novastar. Just before he was terminated on Jan. 3, he received a little sweetener. Novastar discontinued its deferred compensation program for executives and Mr. Hartman received $2.15 million for “services rendered to the company,” financial filings show.

Mr. Hartman could not be reached for comment.

Of course, a big haul in the home-lender derby went to Angelo R. Mozilo, the chief executive and co-founder of Countrywide Financial. Between 2003 and year-end 2006, he received almost $60 million in salary and bonus. And from mid-2006 to mid-2007, he sold stock worth $129 million, filings show.

But after Mr. Mozilo and Harley F. Snyder, a consultant and real estate investor who is chairman of Countrywide’s compensation committee, were asked to testify before Congress about the company’s munificent pay packages in recent years, Mr. Mozilo said he would give back $37.5 million in severance pay, consulting fees and perquisites such as use of the company jet.

In a statement, Mr. Mozilo said his decision was “in the best interests of Countrywide’s employees, customers and shareholders.” He is expected to retire when Countrywide is absorbed by Bank of America.

Such is the way of our world today. When boom goes bust, the handful of winners moves on, bankrolls largely intact. The legions of losers, meanwhile, try to figure out what hit them. As the American taxpayer will probably foot much of the bill for this crisis, those legions include you.


Copyright 2007 The New York Times Company




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