Countrywide and Risk Management – All The Best Intentions…

Countrywide Seeks Rescue Deal

Bank of America Corp. is near agreement to take over tottering mortgage giant Countrywide Financial Corp., in a move that could build a bulwark against the mortgage-default crisis by protecting one of its biggest casualties from collapse.

At the end of 2004, Sherry Whitley, then the Executive Vice President of the Enterprise Risk Assessment Group for Countrywide, wrote this article for the Institute of Internal Auditors FSA Times Publication.

Countrywide’s strategic-planning process includes a companywide focus on managing risks.

In the wake of headline-grabbing corporate financial scandals, management and boards of directors of public companies are under intense pressure to increase their involvement in the strategic and operational activities of the companies they oversee. Executives at Countrywide Financial Corporation, a diversified financial services provider, reviewed various ways to provide a more focused, comprehensive approach to help their leadership teams identify and better manage business risk across the organization. Approaching risk with the goal of increasing shareholder value, in mid-2002 Countrywide incorporated comprehensive enterprise risk-management techniques into its leadership strategy, focusing board participation on a more global, disciplined decision-making process than has historically been used in the past.

In 2007, the Institute of Internal Auditors and their Research Foundation, lauded Countrywide’s Risk management initiative.

Countrywide Financial Corporation, the subject of our first case study, has the most comprehensive ERM program we have seen. Readers who want to know how a state-of-the art ERM program operates will see it illustrated through Countrywide’s example.

A writer for Internal Auditor magazine, an IIA publication, wrote in April of 2007 about this model initiative.

The largest independent originator and servicer of mortgage loans in the United States, Countrywide has the most comprehensive ERM program of the organizations in the study. Under the leadership of Senior Managing Director Walter Smiechewicz, Countrywide is currently building Sarbanes-Oxley functionality into an internally developed enterprise risk assessment software application…Countrywide’s Enterprise Risk Assessment division has 45 professionals with risk assessment responsibilities. They are supplemented by 112 internal auditors within the Enterprise Risk Assessment division and the risk management specialists in another division who manage credit and market risk for Countrywide…Enterprise risk assessment at Countrywide has both a bottom-up and top-down governance structure. It has led to a major restructuring of committees from the board level down through operating units. This restructuring has improved the flow of risk information throughout the organization…Countrywide’s program is truly “best practice…”

Countrywide’s version of the subprime crisis hit the papers last August. Unfortunately, their auditor, KPMG, was also the auditor for New Century, one of the first mortgage lenders to hit the skids. KPMG inherited the account from Grant Thornton. The issue is risk management. So what went wrong?

Well, according to the WSJ Deal Journal, “Bank of America CEO Ken Lewis was hailed as a hero when he agreed back in August to inject $2 billion into Countrywide. It didn’t take long, however, for it to become apparent that he arrived way too early for his coronation appointment. Even though Countrywide stock had fallen more than 50% from its high at that point (to $21.82), it still had a lot more distance to drop. With Countrywide stock at less than $5, Lewis is back for more, negotiating a purchase of the whole company. Though he may seem a glutton for punishment, in fact, Lewis may have little choice. Countrywide is on the precipice of a black hole. Should the company slip into bankruptcy it could take BofA’s whole investment down with it. “

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6 replies
  1. Independent Accountant
    Independent Accountant says:

    I ignore these laudatory articles. They are puff pieces. About three months before Enron imploded, Texas CPA had an article about a company with an exemplary finance department: Enron. In 1977 Dun’s Review had an article about a company with excellent financial management, Continental Illinois. And the beat goes on. No one should take these articles seriously.

  2. Anonymous
    Anonymous says:

    So, Francine, what do you think about ERM as a formalized process? Do you think that an internal audit function can effectively assess whether an entity’s enterprise risk management processes are really doing what they purport to do? Do most internal auditors have the judgment or the background to make such assessments? (Would they be internal auditors if they did?)

    A few years ago, I know that some of the large public accounting firms strongly encouraged clients to develop a formalized ERM process because it’s now considered a “best practice” for firms of a certain size.

    Haven’t successful entrepreneurs and executives always performed risk management? Somehow, I suspect the delegation of such a function to a formal committee may not be the right answer. ERM is a popular buzzword for those who push the latest management trends and earn consulting fees by doing so.

    I have had some exposure to the workproduct of a formal ERM function in a well-known organization. Color me skeptical that the process generates meaningful results. As usual, the results are only as good as the people that generate them.

  3. Independent Accountant
    Independent Accountant says:

    I agree with you. ERM is more nonsense for consultants to sell. Imagine, auditors are supposed to look at this stuff and assess risks. This is crazy.

  4. Anonymous
    Anonymous says:

    I’ll add another thought here. Some people blame the entire CDO fiasco on the excessively quantitative approach to risk taken by many on Wall Street. Could the same be the case at Countrywide?

Trackbacks & Pingbacks

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