"Countrywide Financial Corp., once the nation’s biggest home lender, which originated more than $450 billion in mortgages annually, or about one-fifth of all home loans, embodies the subprime mortgage crisis more than any other company.

“It seems like CEOs hit the lottery even when their companies collapse,” said Rep. Henry Waxman, the California Democrat who chairs the U.S. House Oversight and Government Reform Committee, at the March 7 hearing on CEO pay and the mortgage crisis. No CEO epitomizes that better than Countrywide Chairman and Chief Executive Officer Angelo Mozilo.

At the mortgage lender, stock-option compensation rewarded executives for short-term stock performance even while they pushed lending practices that were not sustainable over the long run. During the height of the real estate bubble between 2004 and 2007, Mozilo cashed in on these short-term gains by exercising stock options valued at $414 million, prompting an informal U.S. Securities and Exchange Commission (SEC) investigation into the sales. As a result, he already had pocketed a tidy profit by the time the long-term consequences of his decisions finally caught up with the company’s share price.

In 2004, Countrywide became the largest U.S. mortgage lender, in part, by using aggressive sales techniques and by lowering lending standards. Like other lenders, Countrywide also introduced exotic mortgages that allowed borrowers to qualify for larger mortgages. As the housing boom peaked in 2005, an increasing percentage of Countrywide’s borrowers were sold “pay option ARMs,” a nontraditional mortgage the lender first offered to its borrowers in 2001.

A pay option ARM is an adjustible rate mortgage loan that allows the borrower a choice of payment methods, including a minimum payment option that is less than the interest owed. Borrowers who select the minimum payment option have the difference between the interest they owe and the interest they actually pay added to their outstanding loan balance each month in a situation known as “negative amortization.” Over time, borrowers who pay the minimum payment also face elevated interest rates.

As the real estate bubble deflated in the second half of 2007, Countrywide suffered $1.6 billion in mortgage-related losses. By the end of the year, more than 5 percent of Countrywide’s $28.42 billion in pay option ARMs were at least 90 days overdue and 71 percent of its pay option ARM borrowers were making minimal payments. Countrywide also disclosed that only about one-fifth of its borrowers had fully documented their incomes before receiving the loans.

In August 2007, deteriorating credit market conditions forced Countrywide to seek outside financial help by selling $2 billion in convertible shares to Bank of America. As the mortgage credit crisis worsened, Countrywide risked losing both its investment-grade rating and also violating its bank loan covenants. In January 2008, Countrywide announced a $4 billion merger with Bank of America, at a loss of $20 billion in market value from the previous year.

Before this end-game transpired, Mozilo had doggedly bargained a very lucrative employment agreement at the end of 2006, despite the vocal criticism it received. In fact, in an e-mail to Countrywide’s compensation consultant, Mozilo complained that “Boards have been placed under enormous pressure by the left-wing, anti-business press and the envious leaders of unions and other so-called “CEO Comp Watchers.” At the time, Mozilo also proposed to collect a $3 million pension while he remained an employee of Countrywide.

On the Friday before Christmas 2006, Mozilo and Countrywide finalized his new employment agreement. The annual pay terms included a base salary of $1.9 million, an incentive bonus of between $4 million to $10 million, an equity award of $10 million and continuation of Mozilo’s other perks and fringe benefits. The new contract also promised him the $37.5 million in severance benefits.

But when the financial success that made it possible for him to get such an employment agreement proved so fragile that the entire company had to be sold at a fraction of its previous market capitalization, Mozilo could no longer avoid making some concessions. Facing growing public criticism, Mozilo announced that he would voluntarily give up his $37.5 million golden parachute that he would receive when Bank of America completed its acquisition of Countrywide. Reflecting the changed financial conditions, the company also canceled its plans to host a ski trip for mortgage bankers at the Ritz-Carlton ski resort in Avon, Colo., where rooms start at $725 a night. The itinerary reportedly included dinner at Spago, the famous restaurant whose menu includes Kobe steak as an entrée for $105.

But Mozilo will not be leaving Countrywide empty-handed. He is entitled to an enhanced supplemental executive retirement plan with a lump sum worth $22.4 million, a pension plan with a present value of $1.3 million and $20.6 million in deferred compensation. And while Countrywide shareholders have seen the value of their investment fall 85 percent since February 2007, Mozilo also will keep his $414 million in stock options that he exercised between 2004 and 2007. On top of that, Mozilo, who intends to retire after Bank of America Corp.’s (BAC's) pending takeover of Countrywide this year, will receive $10 million worth of stock in BAC, according to filings with the SEC."