The Countrywide Credit Crisis

1
The Countrywide Credit Crisis
Trent Mullins Sarah Oline Gustavo Pifano
2
Countrywide Financial Corporation

• Founded in 1969
• Operations in Mortgage Banking, Banking,
  Capital Markets, Global Operations
• The Nations largest mortgage lender
• 91 of Fortune 500
• Holds 17 of all US mortgages

3
Summer 2007 A Weak Economic Climate

• Lack of confidence in borrower credit-worthiness
• Increase in the rise of foreclosures and mortgage
  defaults, particularly among borrowers with
  subprime loans

• A Subprime loan is loan given to borrowers
  with poor credit history it comes with a higher
  rate of interest is usually adjustable
• With 9.7 of the market share, Countrywide is
  the nations largest subprime loaner

4
Summer 2007 A Weak Economic Climate

• Lack of confidence in borrower credit-worthiness
• Increase in the rise of foreclosures and mortgage
  defaults, particularly among borrowers with
  subprime loans
• Over speculative housing market

5
Problems at Countrywide
A) May 16, 2007 Countrywide Financial Corp.
announces agreement to sell 4 billion in
floating debt securities B) July 24, 2007
Countrywide announces profits for Q2 are down
33 C) August 16, 2007 Countrywide announces its
plan to borrow 11.5 billion from 40 banks to
offset liquidity problems
6
August 16 The Crisis Begins

• Why would a mortgage company in a weakening
  market need 11.5 billion?
• Bankruptcy fears
• -Stock price drops 50 from the beginning of
  June to the end of August

7
Other Losers

• Merrill Lynch suffers 7.9 Billion in subprime
  related losses for 2007s Q3
• Citigroup profits down 3 Billion
• Bank of America earnings down 1.5 Billion for Q3
• American Mortgage files bankruptcy

8
Crisis Fallout

• Countrywide losses are 1.2 billion for Q3
  first quarterly loss in 25 years
• 12,000 employees terminated
• CEO Angelo Mozilo under SEC investigation
  regarding his dumping of shares just prior to
  Countrywides stiff decline he claims he is
  ready for retirement Mozilo is 68 years old
• Housing market is looking bearish
• Countrywides task now is to convince investors
  that the company is returning to a policy
  designed to safeguard the interests of consumers
  and shareholders alike.
• Amos, Julie. Mortgage Crisis Topples
  Countrywide. 05 Oct 2007. www.rebuild.org.

9
External Criticism

• 4,000 News headlines since the Countrywide saga
  began from the New York Times to the Canberra
  Times
• NC State Treasurer, Richard Moore, launches SEC
  investigation into Countrywides CEO over his
  alleged dumping of CFC shares just before their
  rapid devaluation Moore is not only a
  shareholder, but also a politician serving his
  constituents
• Investigation still on-going
• New York Times writer Gretchen Morgensens
  vendetta to protect shareholder rights

10
Crisis Communication

• Silence
• CFC initially issues very little public comment
  or explanations
• Slow reactions further sustained a negative image
  of the company
• CEO eventually gives in to interviews
• Blame
• Blames poor housing market for its financial
  problems
• Critics claim Countrywide did not react to the
  quick enough to the changing market
• Rebuttal
• Countrywide issues an online response to NYT
  writer Gretchen Morgensons attack on the
  companys lending practices
• Focuses on their long and positive history as
  well as their dedication to employees and
  borrowers
• Countrywide assists the American Dream.
• Response highlights that Countrywide has already
  slowed its subprime loans (9 in 2006 and down to
  5 in July 2007) and that it will continue to do
  so in the future.

11
Image Restoration Strategies

• Denial Company takes no direct responsibility,
  blaming poor housing market and media attacks
• Diminishment Dismisses bankruptcy accusations
  and stresses long history of success and positive
  outlook for future
• Excuses/Good Intent Asserts defaulting loans not
  given with ill-intent, rather to assist borrowers
  with poor credit histories in owning their own
  home

12
Rebuilding

• Bring in outside crisis managers
• Implement Internal PR campaigns
• Rebuild reputation through corrective action

13
Enter The Crisis Consultants

• Burson-Marsteller, a major and experienced public
  relations firm, hired to structure and organize
  an internal and external communication game plan
• Worked with Johnson Johnson, Sony, Ford, Dow
  Chemicals and others in their 50 year history
• 6 people on site in Calabasas and 25 people
  working on the campaign throughout the
  organization

14
Internal Communications

• Protect Our House
• Internal campaign to encourage employees to stand
  strong in the face of adversity
• Reaches across all key audiences
• PR blitz aimed at repairing its reputation
  Wall Street Journal
• Drew Gissinger, executive managing director of
  CFC, outlined the plan in a conference call with
  250 opinion leaders within Countrywide
• Transcript of the call sent to all employees
  along with an outline of the plan
• Hosting Town Hall meetings in Calabasas and with
  employees across the country to discuss these
  efforts
• Demonstrates an understanding that rebuilding and
  bolstering must take place internally as well as
  externally

15
Protect Our House (Cont.)

• SOCIAL MISSION
• Falling back on Corporate Values
• Were dedicated to helping people buy homes by
  lowering the barriers to homeownership.
  Homeownership has been and will continue to be a
  bedrock of stability in our country and a path
  for everyone to achieve the American Dream
• We have helped over 20 million Americans achieve
  this dream since we were founded in 1964
• We care deeply about this company, and know that
  this organization is very, very special
• Drew Gissinger, Jason Schechter

16
Protect Our House (Cont.)

• BUSINESS MISSION
• Were competitive to a fault, intense,
  passionate about what we do and our work
  achievements help define who we are
• Every time weve faced a paradigm shift within
  our business, weve emerged stronger than before.
  This time will be no different
• Ive made a lot of people rich or richer who
  have followed me on my past crusades, please
  trust that the same holds true here
• -Drew Gissinger, Jason Schechter

17
Employee Loyalty

• Employee loyalty is a key component of the
  campaign
• Asked to tell Countrywide Story to everyone
• Asked to sign a Protect Our House pledge
• Receive a Protect Our House wristband

18
Protect YOUR House

• Sister external campaign that targets certain
  segments of customers , business partners, and
  other stakeholders
• Working for them as well
• Pledge extensive media outreach efforts and
  direct communications to partners as they
  navigate the crisis
• Growing, winning, and being the best is hard
  wired into our DNA
• Drew Gissinger

19
Corrective Actions

• Oct. 23, 2007 CFC announces comprehensive home
  preservation program by calling for refinancing
  of up to 16 billion of home loans
• Oct. 31, 2007 Agree to send HOPE NOW letters to
  at-risk borrowers, asking them to get help
• Nov. 7, 2007 CFC partners with National
  Foundation of Credit Counseling (NFCC) and
  encourages consumers to utilize the Home
  Ownership Mortgage Education (H.O.M.E.) program

20
Government Regulation

• December 3, 2007 Secretary of Treasury Hank
  Paulson announces the HOPE NOW Initiative
• HOPE Now will seek to refinance and repackage
  subprime adjustable loans into a State Housing
  Agency with municipal bond rates this will lower
  said interest payments by approximately 2 .
• No Federal money will be used to bail out
  defaults States will have to bear the cost
• Countrywide pledges full cooperation and support
  for HOPE NOWs initiative and cause.

21
Looking Forward

• Despite heavy Q3 losses, Countrywide expects a
  profitable Q4 and 2008
• Stock price bottomed out at 8.64 and has been
  slowly rising (currently around 12/share)
• Internal campaigns appear to have stabilized
  employee and stakeholder morale
• Endorsed and helped found HOPE NOW Initiative
• Adjusted business models as firms learn from
  subprime mistakes
• When home prices go back up, Countrywide will be
  on top again
• -Dan Tarman
• Former Managing Director, Corporate
  Communications

22
Discussion Questions

• How can a corporation find the right balance
  between its social and financial missions?
• How can a publicly traded company control
  reactions to negative news headlines when the
  headlines have a severely negative impact on the
  companys stock value and reputation?
• Should Countrywide have taken any direct
  responsibility for the number of foreclosures on
  its subprime loans?