A Friend in Need

Tuesday, June 17, 2008

SEEKING TO refinance his Delaware beach house in 2004, Sen. Kent Conrad (D-N.D.) did what any ordinary property owner in his position would have done. On the advice of his friend James A. Johnson, who also happened to be the former chief executive officer of mortgage giant Fannie Mae, he called Angelo Mozilo, the CEO of Countrywide Financial. Soon Mr. Conrad had a $1.07 million loan -- at a discount, personally ordered for him by Mr. Mozilo, of $10,500 in fees. A few weeks later, Mr. Conrad was back in touch with Countrywide, this time to refinance his eight-unit apartment building in Bismarck, N.D. Countrywide normally does not lend on properties with more than four units, but, on Mr. Mozilo's orders, Mr. Conrad got $96,000. Clearly, it's good to be a senator, and it's good to be a "Friend of Angelo" -- as favored VIP borrowers were known at Countrywide.

Of course, it's even better to be a Friend of Angelo if the public doesn't know about it. Now that Mr. Conrad's status is known, along with that of other FOAs -- including Mr. Johnson, Mr. Conrad's Senate colleague Christopher J. Dodd (D-Conn.), former Clinton administration Cabinet officials Donna E. Shalala and Richard C. Holbrooke, former Bush housing secretary Alphonso Jackson, and ex-Fannie Mae CEO Franklin D. Raines -- it's worth figuring out exactly what is, and is not, wrong with this kind of help.

It's not shocking that Mr. Mozilo passed out favors in pursuit of business from the well-connected, nor that they accepted said favors. The ethical calculus starts looking different when the FOAs work for the government or are sitting members of Congress who ultimately make the rules by which Countrywide, whose notoriously lax underwriting of subprime loans contributed to the current credit crunch, must play.

The Senate's ethics rules quite wisely forbid members from soliciting gifts or knowingly accepting gifts worth more than $100 from entities, such as Countrywide, that employ lobbyists. One question is whether the FOA treatment counts as a gift or fits into an exception for loans at terms generally available to the public. In this case, does "the public" mean everyone, all Countrywide customers or just all FOAs (of whom there were apparently hundreds)? And how should the senators' economic circumstances (credit scores, net worth, etc.) figure in?

Mr. Dodd says that he never spoke to Mr. Mozilo and never knew that the CEO had arranged a pair of behind-the-scenes rate cuts for him on properties in the District and Connecticut. Mr. Conrad says that he was in the dark, too. Yet he spoke with Mr. Mozilo; what did he think the conversation was going to get him? The loan on the Bismarck apartment was quite unusual for Countrywide, which normally did not make loans on apartment buildings because they are difficult to securitize. Did Mr. Conrad, who not only invests in real estate but also chairs the Budget Committee and sits on the tax-writing Finance Committee, not realize that? Mr. Conrad has offered to refinance the Bismarck building and to donate $10,500 to charity to make up for the discount he got on the Bethany place. He obviously hopes that will put the matter to rest and that everyone will move on. We'd like to see all the questions answered first.

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