Insights from the Failure of the Countrywide Financial Corporation

37 Pages Posted: 8 Jun 2013  

Willoe Freeman

University of Technology Sydney (UTS); Financial Research Network (FIRN)

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ; Financial Research Network (FIRN)

Anne Wyatt

University of Queensland

Date Written: March 14, 2013

Abstract

This paper evaluates the business activities, financial reports, and management compensation practices of Countrywide Financial Corporation (Countrywide) in the period preceding the company’s financial distress and leading to its eventual takeover by Bank of America in 2008. This analysis provides a number of insights into the risks that Countrywide was exposed to which may guide future research and financial management. First, Countrywide was heavily reliant upon the securitization of mortgage loans to finance its activities, which was apparent from the financial report disclosures. Second, these securitization transactions exposed Countrywide to significant financial risk because of retained interests and the poor quality of many underlying mortgages. However, the risk was not reflected transparently in the financial reports, as evidenced by the timing of stock price responses. Untimely market responses suggest the equity market was not aware of Countrywide’s risk exposure until shortly before the company’s solvency crisis. Third, the design of CEO compensation at Countrywide encouraged and rewarded management for exposing the firm to significant risk. The analysis and supporting evidence in this paper contributes insights into financial management that is relevant for researchers and professionals.

Keywords: Mortgage Loan Securitization, Financial Reporting, Executive compensation

JEL Classification: M41, M48, G01, G21

Suggested Citation

Freeman, Willoe and Wells, Peter Alfred and Wyatt, Anne, Insights from the Failure of the Countrywide Financial Corporation (March 14, 2013). Available at SSRN: https://ssrn.com/abstract=2275772 or http://dx.doi.org/10.2139/ssrn.2275772

Willoe Freeman

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ( email )

P.O. Box 123
Broadway NSW 2007
Australia
+61 (02) 9514 3628 / 3629 (Phone)
+61 (02) 9514 5515 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Anne Wyatt (Contact Author)

University of Queensland ( email )

4072 Brisbane, Queensland
Australia
61 0419125779 (Phone)
61 7 33656988 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
154
rank
174,612
Abstract Views
732
PlumX