The private internal email archive of Bank of America subsidiary Countrywide has been opened up in court in a $10.5 billion (£6.4 billion) lawsuit filed by insurer AIG.
Executive emails sent before Countrywide's devastating collapse were detailed in a New York court as AIG sued parent Bank of America over alleged fraudulent sales practices. Countrywide's failure, as a company that provided a fifth of US home loans, was one of a number of high profile mortgage market problems that preceded the full impact of the financial crisis.
After trawling through hoards of emails sent by Countrywide executives, AIG's lawsuit details some damaging comments made ahead of the subprime mortgage lender's collapse, allegedly showing Countrywide executives were aware that the company was providing loans to consumers who could not repay them and misrepresenting the risk level to the companies they were selling the loans onto.
Countrywide chief executive and co-founder Angelo Mozilo wrote in emails to senior colleagues before the firm's collapse that he was concerned the company's subprime loan products were "toxic", "poison," and "the most dangerous ... in existence", and that by selling them the company was facing "catastrophe". Nevertheless, Countrywide sold billions of dollars worth of the products.
Bank of America rejects the allegations and has said that AIG was a "seasoned" investor that was able to make its own sensible judgement.
The picture painted in the AIG lawsuit is that a number of Countrywide executives were concerned about serious problems with the company's mortgage selling, and that they failed to stop the practices.
Mozilo's emails are drawn out in the lawsuit as some of the strongest statements by the company on its processes. In his messages, the chief executive noted that there was a "disregard for process [and] compliance with guidelines".
Other executives are also shown to have written that they knew of dangers. Countrywide's risk management director Frank Aguilera told colleagues in an email that the company had an "inability to adequately impose and monitor controls on production operations". Over 23 percent of its subprime loans were generated as 'exceptions', being sold outside the company's own guidelines.
A series of other emails reveal that Countrywide was approving loans as long as it could package and sell them in the market, rather than assessing closely the likelihood of them being repaid, AIG alleges.
David Sambol, Countrywide home loans' president and chief operating officer, is effectively accused in the lawsuit of encouraging risky practices. He wrote in an email in 2005 that the company's "pricing philosophy" for selling mortgage-backed products ought to be made clear so that "we should be willing to price virtually any loan that we reasonably believe we can sell/securitize without losing money, even if other lenders can't or won't do the deal".
Other executives warned Sambol in emails of the risky practices, according to AIG. Emails listed in the lawsuit allegedly reveal that Countrywide managers were aware that by breaching the guidelines many of the loans would result in default.
Chief risk officer John McMurray wrote to Sambol in 2005 that "We've sold much of the credit risk associated with high risk transactions away to third parties", and that this risked default and future liability. Two years later, he wrote again to Sambol: "I doubt this approach would play well with regulators, investors, rating agencies, etc. To some, this approach might seem like we've simply ceded our risk standards . . . to whoever has the most liberal guidelines".
McMurray attempted to enforce a set of underwriting guidelines, according to the suit, and has since testified that his efforts were ignored by a number of other managers.
AIG alleges that Bank of America, in itself and through subsidiaries Countrywide and Merrill Lynch, sold mortgage backed securities in methods "marred by fraud, misrepresentations and omissions". It claims that not only were the mortgages sold to people who could not repay them, but they were packaged into financial market products branded as low risk. AIG says it bought $28 billion of the products based on the risk profile advertised.
After the suit was filed on Monday in the New York Supreme Court, in Manhattan, Bank of America - which denies the charges - lost nearly a quarter of its stock market value. Last year, Goldman Sachs paid regulator the Securities and Exchange Commission $550 million in order to settle allegations that it fraudulently marketed mortgage-backed securities, though it did not admit wrongdoing.
BofA said in a statement that AIG chose to take the risks, and knew what it was doing. "AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets. AIG is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors. We reject AIG's assertions and allegations."
AIG responded in turn that: "It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct. Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold. Now that it is clear that those representations were false, Bank of America must be held to account."
Last year, Angelo Mozilo made a multimillion dollar settlement with US regulator the Securities & Exchange Commission, which had accused him of insider trading and securities fraud. He is banned from being a director on the board of any public company. Sambol and Sieracki also agreed to fines.
Extract from a key email by Countrywide chief executive Angelo Mozilo to his chief financial officer Eric Sieracki, on 13 April 2006:
"I want [home loans president] Sambol to take all steps necessary to assure that our origination operation "follows guidelines" for every product that we originate. I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. In my conversations with Sambol he calls the 100% sub prime seconds as the "milk" of the business. Frankly I consider that product line to be the poison of ours. Obviously as CEO I cannot continue the sanctioning of the origination of this product until such time I can get concrete assurances that we are not facing a continuous catastrophe. Therefore I want a plan of action not only from Sambol but equally from McMurray as to how we can manage this risk going forward."