Last week the SEC made much of Angelo Mozilo, the very tan (and very disgraced) co-founder of Countrywide. But Mozilo won’t see a jail cell – and he might not even pay any fines. Oh well...

But the goat, on which the lot fell to be the scapegoat, shall be presented alive before the Lord, to make an atonement with him, and to let him go for a scapegoat into the wilderness.
– Leviticus 16:10

And thus endeth the reign of Angelo R. Mozilo, steward of Countrywide, scion of Subprime. (In case you haven’t heard, the Securities and Exchange Commission is coming after the Orange One with both barrels.)

A prison joke or two springs to mind. Will poor ol’ Angelo be trading his cigarette rations for cucumber slices to put over his eyes? Will “the Moz” be hoarding cafeteria carrots to fend off beta-carotene withdrawal? Maybe he’ll need a whole new form of UV protection in Cell Block D...

Actually, that’s all wishful thinking. The “Man With the Tan” isn’t going to jail.

Remember, the SEC is the gang that couldn’t shoot straight. And they don’t have enough to put Mozilo in stir anyway. That’s why the charges filed against him last week were civil, not criminal. The hope is to make Mozilo cough up his ill-gotten stock gains ($140 million or so) and face a lifetime ban on serving as a company officer or director.

On the face of it, the evidence is pretty gruesome. Like the old Henry Blodget/Merrill Lynch case that unfolded in the wreckage of the dot-com bubble, the smoking gun here comes in the form of breathtakingly candid e-mail messages. Mozilo is on record, via e-mail, referring to Countrywide subprime products as “toxic” and “poison.” Another offering was referred to as “the most dangerous product in existence.” And there is more where that came from – lots more.

SEC enforcement director Robert Khuzami calls it “a tale of two companies.” There was the high quality, trusted face of the Countrywide Mortgage business, Khuzami says, and then the “true” Countrywide hidden beneath.

What’s worse, the SEC argues, Mozilo cashed out while encouraging investors to keep the faith (and hold onto their shares). That puts him in the line of fire for an “inside information” charge.

Fake Tan, Fake Case

We’ll see how this plays in the coming months. My early hunch, though, is that the Mozilo dog-and-pony show winds up being a big fat disappointment and little more... not unlike Eliot Spitzer’s failed effort to claw back millions from disgraced NYSE chief Richard Grasso.

In addition to the ham-fisted incompetence of the SEC, there are some non-trivial legal technicalities to deal with here. You can shame a CEO in the public eye, for one, but you can’t prosecute him for being an idiot. That leaves Mozilo and his fellow accused ample room to make the “We weren’t crooks, we were just idiots” defense. This defense has a surprisingly robust track record in court.

What’s more, all of the Orange One’s stock sales were likely pre-approved as part of a timed divestment plan. Many CEOs use automatic stock-sale programs, in which shares are prearranged to be sold on a fixed schedule, to avoid the appearance of selling on news. This setup keeps the exec legally shielded from any “insider information” type charges... of exactly the type the SEC is bringing up here.

As for the “tale of two companies” charge, well, that’s a slam dunk. In regard to Mozilo’s knowledge of the “true” Countrywide there is little doubt. You don’t use words like “poison” and “toxic” in your internal e-mails and then pretend to be a doe-eyed innocent.

But how in the world is the SEC going to make such a charge stick without indicting the whole of Wall Street? In hindsight, the same “shiny on the outside, rotten on the inside” idea applies to Citigroup, Bank of America, Wells Fargo, Moody’s, and at least a dozen other operations still open for business (plus not a few that are closed).

I mean good grief, just look at the ratings companies. An even bigger enabling factor than Countrywide in this whole mess was the complicity of Moody’s, Fitch, and Standard & Poor’s in slapping triple-A ratings on pools of radioactive sludge. Worse still, the big three ratings companies were paid, basically bribed, by the same players set to benefit from the rating itself. Two S&P analysts are on record as saying “It could be structured by cows and we would rate it.” And yet, somehow, these criminally complicit jokers still enjoy the protection and blessing of the feds.

And speaking of the feds, how about the grossly deceptive conduct (and in some cases out-and-out lies) perpetrated by government officials? It still isn’t clear, for example, what role government heavies had in forcing through the B of A/Merrill Lynch merger... or the Bear Stearns fire sale... or the WaMu shutdown... or any number of other hairy deals where the public record isn’t exactly pristine.

Nor is it clear, exactly, what the difference is between the shiny, happy and utterly false statements that fell from the lips of a Paulson, a Geithner or a Bernanke, versus those that issued forth from Angelo Mozilo. Was the game not the same – ginning up public confidence where little was warranted (and none deserved)?

The thing is, if there were ever a true effort made to do a widespread “What did you know and when did you know it” type inquiry – or if the spread of disingenuous optimism were treated as a crime – half of Washington and three quarters of Wall Street would be sent up the river.

The Mafia Model

All of this makes the Mozilo indictment an anti-climactic event on at least two fronts.

First, it isn’t clear the SEC has anything that will legally stick. The e-mail confessions are undeniably juicy, but running one’s company into the ground is not a crime in itself, even if the housing market goes over the cliff alongside. As The Economist points out in regard to Countrywide’s dodgy offerings, “poor risk management, though lamentable, is not illegal.”

Second, even if the SEC wins their game of pin-the-tail-on-Mozilo, the whole thing is little more than a red herring. In the big scheme of things, Mozilo is a cog in a vast machine. Or rather, he is like a mid-level crime boss within the ranks of a widespread mafia network. Cut him down and nothing changes... in due time another mid-level player simply springs up to take his place.

If the good guys really wanted to make a difference, they would focus on fixing the system itself. They would focus on cutting out the rotten core and changing how things are done, rather than looking for high-profile “perp walk” candidates to parade before the public eye.

As it stands now there has been no genuine effort, on the part of Washington or Wall Street, to actually change the system. In fact we have seen the polar opposite – a Herculean effort to preserve the old system in countless subtle ways. The bosses that matter are still in power. It is precisely because Mozilo no longer matters that he has been deemed expendable. In going hard after lesser players for the sake of the TV cameras, the real questions are left unanswered... the real cleanup left undone. Sad to say, this is probably deliberate.

And the net result of this biz-as-usual mentality? Increased odds of fresh financial disaster.

For instance, investors are breathing easy now in belief that the worst of the banking crisis is over. Rapidly accumulating evidence suggests that notion is fantasy. Within the next 12 months, your humble editor sees a better than 50/50 chance of a new banking panic even worse than the one that just passed... made so in part by the infuriating focus on cosmetic adjustments over real solutions. Be careful out there.

Other Related Topics: Justice Litle , Safe Haven Investor , U.S. Securities and Exchange C

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