Insights from the failure of the Countrywide Financial Corporation

Freeman, Willoe, Wells, Peter and Wyatt, Anne (2014) Insights from the failure of the Countrywide Financial Corporation. International Journal of Managerial Finance, 10 1: 115-136. doi:10.1108/IJMF-12-2012-0131

Author Freeman, Willoe
Wells, Peter
Wyatt, Anne
Title Insights from the failure of the Countrywide Financial Corporation
Journal name International Journal of Managerial Finance   Check publisher's open access policy
ISSN 1743-9132
Publication date 2014-01-01
Year available 2014
Sub-type Critical review of research, literature review, critical commentary
DOI 10.1108/IJMF-12-2012-0131
Open Access Status Not yet assessed
Volume 10
Issue 1
Start page 115
End page 136
Total pages 22
Place of publication Bingley, United Kingdom
Publisher Emerald
Language eng
Formatted abstract
Purpose – 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.

Design/methodology/approach – Case study evaluating the failure of Countrywide Financial Corporation.

Findings – 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.

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

Originality/value – 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.
Keyword Financial reporting
Executive compensation
Mortgage loan securitization
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Critical review of research, literature review, critical commentary
Collections: Official 2015 Collection
UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 0 times in Thomson Reuters Web of Science Article
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Created: Tue, 28 Jan 2014, 21:18:02 EST by Karen Morgan on behalf of UQ Business School