When you're considering whether to buy shares of a company, beware if the CEO is selling. I don't care what reason the CEO gives for the selling in public; they always have an excuse, but executives rarely sell a share because they think it's going higher. Case in point: Angelo Mozilo's Countrywide Financial ( CFC). And if you're an investor in Countrywide, one figure must be sticking in your throat right now. Eighteen bucks. That was the kicker in last week's $2 billion deal with Ken Lewis' Bank of America ( BAC). Not only did Lewis negotiate a sweet 7.5% interest rate on the loan he made to Countrywide, but he also got the right to convert the loan into new Countrywide stock, at just $18 a share, if he wants to. Eighteen bucks. Trust Ken Lewis to get the sweet end of the deal. In recent years, Mozilo has been selling ordinary investors his own shares. Millions of them. And they didn't get anything like these terms. How much did they pay? In total, company filings show Mozilo has sold a staggering $425 million worth of Countrywide stock to outsiders over the past three years. Average price: $36.50 a share. Ouch. Yes, it's better to be Ken Lewis. I hate to imagine how those investors feel now. Countrywide stock fell Tuesday to just $19.41 in the deepening gloom about the housing market. Everybody likes wealth creation, and everyone celebrates a self-made man. Mozilo started Countrywide and built it up over many decades into an industry giant. In a statement, Countrywide spokesman Rick Simon said Mozilo still owns about 1.5% of the company. (That should be worth around $170 million at current prices.) As for the $425 million in stock sales, Simon observed that Mozilo, who is 68, has been diversifying his portfolio as he nears retirement.
Fair enough. But isn't it remarkable how insiders always seem to choose the perfect moment to do this? I've already written about this phenomenon at other big housing-related companies like the homebuilder Toll Brothers ( TOL). After you deduct his stock option costs, Mozilo pocketed $338 million in profits from selling shares while times were good. Meanwhile, the investors who bought those shares have already lost $200 million. That's 47 cents on the dollar. This wasn't wealth creation. This was just a wealth ... transfer. Mozilo's personal sales continue. He sold more stock just two weeks ago. He's certainly not doing anything illegal. His trades are made through an executive "10b5-1" stock selling program. For the uninitiated, that means he decides many months in advance to sell the stock. The sales are then carried out independently by a broker, over a period of time, and without any further input by Mozilo. It's a common and sensible system that is supposed to let executives sell shares without running afoul of insider-trading laws. Yet Mozilo's most recent sales were part of a program he set up as recently as last December, and amended in February. By that time, of course, the mortgage market was already falling apart.
And while he has no control over the stock sales made in his 10b5-1 program, he does inevitably have huge influence over his company's share price while the shares are being sold. An observation: Back in March, when the market first started panicking about the mortgage slump, Countrywide stock was still trading around $35. I wrote in this space about the fact that Mozilo and other insiders were shoveling stock out the door on an heroic scale. The CEO responded by going on TV to say that the mortgage turmoil was an "overreaction" that would "pass rather quickly" once people looked at the situation calmly. He even went further, predicting that his company would benefit from the industry shakeout. "This will be great for Countrywide because at the end of the day all the irrational competitors will be gone," he said. "A lot of our competitors are disappearing, virtually overnight." As a result, he said, Countrywide was seeing "a flow of new business coming in. ... At the end of the day, we're going to be in an extremely dominant position." Comments like that did nothing to hurt the share price, which stayed above $35 right through the spring, and even into July. During that period, Mozilo's broker sold $95 million worth of his shares at an average price of $35.37, company filings show. The investors who bought those shares have already lost $41 million. How does Mozilo view the situation now? "I don't see a light here at the moment," he said last week.