Bowing to pressure from big shareholders, Countrywide Financial (CFC) has invited outsiders to assess the mess inside. In a November letter to one major investor, the embattled mortgage giant revealed that its board has hired Promontory Financial Group, a consultancy filled with former regulators, to review the company's corporate governance policies.
As the nation's biggest mortgage company, Countrywide has gotten bludgeoned by falling home sales, bone-dry capital markets, and rising default rates on its existing loans. In October the Securities & Exchange Commission started investigating big stock sales by insiders, notably Chief Executive and co-founder Angelo Mozilo. On Nov. 26, Senator Charles Schumer (D-N.Y.) called on federal regulators to look into $51 billion in advances made by the Federal Home Loan Bank Board of Atlanta to Countrywide.
"I find these numbers alarming as reports continue to emerge about how Countrywide's reckless and predatory lending practices were a leading contributor to today's foreclosure crisis," Schumer said in requesting the probe. The following day, David Bigelow, Countrywide's managing director of investor relations, said his company was very familiar with the bank board's collateral requirements and that it was in compliance.
A "Reputation for Integrity"
Those sorts of problems may play to the strengths of Promontory, a Washington (D.C.) firm founded in 2001 by Eugene Ludwig, a former U.S. Comptroller of the Currency. It also counts former Nasdaq (NDAQ) Chairman Frank Zarb, former SEC Chairman Arthur Levitt, and Alan Blinder, a former vice-chairman of the Board of Governors of the Federal Reserve, among its senior advisers. "I can't think of anyone that would go in with the reputation and skill set of Promontory," says H. Rodgin Cohen, the charman of Sullivan & Cromwell in New York. Ludwig "has an extraordinary reputation for integrity."
Promontory first gained prominence back in 2002 when Allied Irish Banks (AIB) hired it after a trading scandal that cost the bank $750 million. In a review dubbed the Ludwig Report, Promontory determined a rogue trader was at fault and recommended beefing up compliance and management. Allied followed its advice and ousted several executives as a result.
In 2002, PNC Financial Services Group (PNC) tapped Promontory to examine its practices after regulators questioned some of its off-balance-sheet maneuvers. PNC Chief Executive James Rohr credits Promontory with putting in risk management criteria that helped the firm avoid dicey loans, such as subprime mortgages.
Promontory later advised Washington (D.C.)-based Riggs National Bank after a 2005 scandal involving overseas accounts. The CEO and other executives stepped down, and the company was ultimately sold, to PNC Financial. When still head of Citigroup (C) in 2004, Charles Prince III hired Promontory to help deal with Japanese regulators after the big bank got the boot from the private banking business in Japan. Promontory's internal review found several Citigroup managers were responsible for regulatory shortcomings that included lax money-laundering controls.
Potential Impact Questioned
Outside of their work at Promontory, Levitt and Zarb have played a key role in the cleanup at insurer American International Group (AIG)—accounting abuses there prompted the ouster of longtime CEO Maurice Greenberg in 2005. In an effort to improve corporate governance, the board, which included Zarb as chairman and Levitt as a senior adviser, has added more independent directors and split up the roles of chairman and CEO.
It's not unlike the changes big shareholders want at the mortgage giant. In pointed letters to the Countrywide board, the American Federation of State, County & Municipal Employees (AFSCME) and CtW Investment Group, which advises pension funds, have called for the company's co-founder Mozilo and lead director, Indiana real estate developer Harley Snyder, to step down. The union advisers also want the company to separate the positions of chairman and CEO, both currently held by Mozilo, replace all four members of the compensation committee, and hire two new independent directors.
The question remains, though, whether Promontory will have much of an impact at Countrywide. Some observers believe Promontory may be no more than a hired gun for Countrywide management and that present management at the company will stay. Says Richard Ferlauto of AFSCME, a big investor in Countrywide: "They will not respond with any productive changes that challenge the current board or the CEO." Promontory and Countrywide declined to comment.