Today’s news shows that Allstate is suing Countrywide (owned by Bank of America) for misrepresenting the mortgage investments Countrywide sold Allstate.
You can read a good analysis here.
Allstate claims to have had no idea what is was really buying, just like most firms have no idea what they’re really buying from their telecom vendors and if they could or should have paid less.
The root problem was that Countrywide apparently systematically did not collect valid information. (Many loans were ‘liar loans.’) Lacking good information Allstate bought investments it didn’t actually want (it wanted AAA securities.) Similarly Countrywide apparently did not report that many approved mortgages (around 20% sometimes more) were ‘exceptions’ to Countrywide’s underwriting standards. Countrywide management appears to have been aware that their loans didn’t meet their underwriting standards and information about the borrowers income, value of the home, etc. was often false but they didn’t do anything to disclose this to investors.
You can read the allegations here
It is a very interesting document.
It is interesting to learn that the exact same problems (lack of visibility, lack of information, use of misleading aggregates) that we see in our clients’ spend on vendor purchases also plagued institutional investor spending on purchases of investments. However this mortgage mess was apparently systemic outright misrepresentation by the underwriters. We find vendors simply don’t provide the information clients need to make an informed decision, and they’re certainly under no obligation to provide it. A huge moral difference on the part of the sellers, but as far as the buyer is concerned the outcome is the same. Interestingly in both cases some important information isn’t even readily available to the sellers let alone the buyers.
Apparently Allstate went to the trouble of checking out many of the individual loans and found huge discrepancies between the reality of the applicants and what Countrywide had stated about the quality of the applicants. This is similar to what we do, our goal is to check EVERY single service to make sure it is adding value and is not misbilled, underused, or overpriced.
One has to wonder though why no one at Allstate did any due diligence sampling of the underlying loans before they bought them…
Presumably because they were too busy and they had no reason to suspect anything was wrong. Too bad they were wrong.