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This paper aims to evaluate 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.

Case study evaluating the failure of Countrywide Financial Corporation.

First, Countrywide was highly reliant upon the securitization of mortgage loans to finance its activities and this was apparent in the financial reports. Second, these securitization transactions exposed Countrywide to significant financial risks, including the risk inherent in the uncertain values of residual interests and warrantees. Problematically, these risks were not transparently reflected in the financial reports, as confirmed by the lag in the timing of stock price responses. This untimely market response suggests the equity market was not aware of Countrywide's risk exposures until shortly before the company's solvency crisis. Third, the compensation practices of Countrywide encouraged and rewarded management for exposing the firm to significant risks.

This paper provides insights into financial management that are relevant for researchers and professionals.

This paper provides insights for researchers and practitioners relating to the impact of asset securitization on business risk and how these business activities and risks are disclosed in the financial reports.

Strategic planning is a misunderstood and maligned managerial tool. Most organizations have tried it but relatively few actually achieve success in strategic planning.

The experience of Countrywide Financial Corporation demonstrates how strategic planning can be used as a key lever for change and describes the benefits that accrued to it through this process. Stanford Kurland, the Company’s COO, engaged Eric Flamholtz to assist with developing a more sophisticated approach to strategic planning at Countrywide. Flamholtz introduced: a template for organizational assessment and development; and a systematic process for strategic planning that had been applied elsewhere with considerable success. The new planning process s became a corporate priority.

The planning system has also led to a variety of other significant organizational benefits including: a constructive forum for elevating management’s focus from tactical and operational concerns to broader strategic challenges; a shift away from a “silo mentality” to a “Countrywide perspective”; a clear set of priorities to guide operating unit activities and decision‐making; measurable objectives that emphasize linkages across organizational boundaries; and greater understanding and communication of the plan throughout the organization.

Kurland was focused on longer‐range issues for the company, but most of the other members of Countrywide’s senior management were more focused on short‐term competitive success in their own divisions. It led to significant changes and benefits at Countrywide, including a strategic shift in corporate direction.

This case study analyzes Countrywide Financial’s responses to its recent financial crisis and illustrates the use of communication theory and image restoration strategies by utilizing several crisis response frameworks. The study uses a critical analysis methodology to examine the communication strategies employed by Countrywide, a large mortgage lending company in order to attempt to restore its image. The authors look at excerpts from media stories, carefully examine the language used by company representatives in response to the banking crisis, and categorize the corporate communications into various strategies as defined in the crisis communication literature. Countrywide faced several crisis situations during the period of this study, including the subprime mortgage crisis, public criticism of its CEO’s executive compensation package, allegations of insider trading, and financial difficulties. Corporate responses are critical in determining what amount of damage is done to the firm’s image during a crisis. Countrywide responded to these situations most often using the strategies of image bolstering, reducing the credibility of its accuser, and minimizing the crisis (Benoit, 1995). Through these communications, the company attempted to appear well established and untarnished. It also criticized the media, the courts, and the regulators in an attempt to reduce their credibility. Countrywide made no deliberate attempt to admit fault or to take measures to prevent the problem from reoccurring.

This research chapter argues lawyers, not just bankers, for good and bad have been involved in all aspects of the current financial crisis. Indeed after examining and assessing various civil causes of action related to the “Mortgage Meltdown” and its aftermath, it appears if lawyers had been less involved or had raised warnings about legal risks as well as economic ones, whether the financial impact would have been so disastrous and widespread. Indeed by raising cautionary flags earlier, lawyers might have better served both the clients’ and the public's long-term interests. This view thus complements issues related to criminally prosecuting mortgage fraud that has also seen explosive growth and where lawyers have again played central roles. Lawyers have been involved at the back end too in terms of legislation or resolving issues such as bankruptcies and foreclosures.

The chapter examines several causes of action the media have reported being raised by various parties and how they illustrate the role lawyers, regulations, and legislation have played in the origins and evolution of the current crisis. The cases explored involve individual parties and class actions. The chapter also analyzes in detail a case representing opposite ends of the origination and foreclosure closure spectrum by describing a derivative shareholder suit against corporate officers and directors actively involved in creating the subprime mess, who were then sued for covering up the inevitable results from failed loans in the reports to shareholders. It thus illustrates the legal complexities emerging from the abuse of complex financial and organizational structures impacting many investors. Finally the chapter concludes by arguing there is a public policy need not only for financial regulatory reform but also for a tightening in the professional standards and regulatory penalties imposed on lawyers involved in such transactions.

The current crisis in the mortgage securitization industry highlights significant failures in our models of how markets work and our political will, organizational capability, and ideological desire to intervene in markets. This article shows that one of the main sources of failure has been the lack of a coherent understanding of how these markets came into existence, how tactics and strategies of the principal firms in these markets have evolved over time, and how we ended up with the economic collapse of the main firms. It seeks to provide some insight into these processes by compiling both historical and quantitative data on the emergence and spread of these tactics across the largest investment banks and their principal competitors from the mortgage origination industry. It ends by offering some policy proscriptions based on the analysis.

The concept of state-corporate crime developed during the late 1980s and early 1990s in a series of papers authored by Michalowski and Kramer (Kramer, 1990; Kramer & Michalowski, 1990; Michalowski & Kramer, 1987). They specifically define state-corporate crime as:Illegal or socially injurious actions that result from a mutually reinforcing interaction between (1) policies and/or practices in pursuit of goals of one or more institutions of political governance and (2) policies and/or practices in pursuit of goals of one or more institutions of economic production and distribution. (Michalowski & Kramer, 2006a, 2006b, p. 15)

This case is taught at the University of Virginia McIntire School of Commerce in the fourth year course, “Corporate Restructuring.” The case is suitable for advanced undergraduates or MBS students that have already completed a course in corporate finance or valuation. The material would fit well in a second Corporate Finance class, particularly if the instructor would like to devote some time to discussing financial distress and restructuring. It could also work well in a business reorganization class at a law school. Danfurn LLC is a U.S. manufacturer and retailer of high-end furniture that is in financial distress following a 2007 LBO and subsequent declines in profitability in the wake of the financial crisis of 2007–08. The nearly 50-year-old company has recently blown through cash flow covenants on its $100 million senior financing facility and is seeking a restructuring of its capital structure that will allow the company to survive. Although Danfurn's lenders are hopeful that a consensual decision can be reached on how to restructure the company without resorting to a bankruptcy filing, filing for bankruptcy or even liquidating the company are very real possibilities. This case is an exercise in negotiating a consensual restructuring of a financially distressed company when stakeholders have varied incentives, legal rights, potential remedies, and interests in how the company will be managed going forward. The case discussion works best if students are divided into groups representing the different stakeholder groups—the senior lender, mezzanine lender, board, private equity owner, and founder interests—and are asked to think about how best to maximize their positions while recognizing the costs of failing to reach a negotiated outcome.

Directors help determine the strategic direction of a corporation and are responsible for ensuring the institution has a good system of internal control. Banking institutions without a strategic direction emphasizing sound lending practices that promote the long-run financial health and viability of the institution will be sued more frequently than peer institutions. Institutions that do not have a good system of internal control will also be sued more frequently. Hence, legal expense is a bank corporate governance measure. We compare the performance of bank legal expense and a widely cited corporate governance index in a regression framework to determine which better predicts bank performance. The regressions indicate legal expense is a much better predictor, hence a better measure of bank corporate governance. Regulators should require legal expense reporting and rank institutions by the ratio of legal expense to assets to help identify institutions with weak governance. Seven case studies illustrate the role of legal expense in corporate governance.

On October 22, 2004, junior trader Mary Lucas was browsing through the recent trading activities of a few convertible bonds the firm held. First Convergence Inc. was a hedge fund specializing in convertible arbitrage founded by three Wall Street traders in 2002. Prior to starting at the firm, she had known little about convertible bonds. Now she stayed late almost every day in order to learn as much about the business as possible. Suddenly, she noticed something unusual about the trading of a convertible bond issued by Countrywide Financial Corporation (NYSE:CFC). Although the average daily trading volume on this bond had been only three thousand during the previous month, it had shot up to fifty thousand in the last three days. Lucas remembered this particular bond. In fact, First Convergence was actually holding a slightly different convertible bond (known as the liquid yield option note or LYON) issued by the same company. On August 20, Countrywide had offered to exchange the new convertible bond for the original LYON. First Convergence had accepted the exchange offer, thus ending up with the new convertible bond. At that time, Lucas was asked to help evaluate the offer, so she was familiar with the features of both bonds. “What's happening?” she asked herself. She quickly checked the recent price movement on Countrywide's stock. The stock had plunged 11.5 percent on Wednesday, October 20, after the company announced earnings below analysts' expectations. On the same day, trading on the convertible shot up. These two events must be related. But how? Is there a potential investment opportunity?

Understanding various features of a convertible bond; identifying and exploiting an arbitrage opportunity

Reviews the latest management developments across the globe and pinpoints practical implications from cutting‐edge research and case studies.

This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context.

The authors reveal how strategic planning has enabled Countrywide Financial Corporation to grow and retain its place as a leading financial services provider. The company's progression from its entrepreneurial roots is chronicled, as is the emergence of a sophisticated planning process to replace the ad hoc approach that had gone before.

Provides strategic insights and practical thinking that have influenced some of the world's leading organizations.

Flamholtz and Kurland's personal involvement in the process allows them to provide a fascinating insight into its development and the benefits that have ensued. A valuable article that contains a wealth of strategic implications.