The theory of moral hazard holds that failure is a necessary part of an economic system. Where would this theory have applied in preventing the demise of Fannie Mae? Be sure to look at all aspects of the case in providing your answer. Now apply the theory of moral hazard to those who walk away from their mortgages. Angelo Mozilo is the former CEO of Countrywide Mortgage, a company that sold all of its mortgages to Fannie Mae and, as noted, was a major lender to Fannie Mae officers and board members. At his deposition in a lawsuit brought against him by a mortgage insurer, he was asked, “After all the foreclosures and ruined lives and lawsuits, do you have any regrets about the way you ran Countrywide?” Mr. Mozilo’s response about the role of his company in the market collapse was as follows:

This is a matter of record. The cause of the problems of foreclosures is not created by Countrywide.

This is all about an unprecedented, cataclysmic situation, unprecedented in the history of this country. Values in this country dropped 50%. This is not caused by any act of Countrywide. It was caused by an event that was unforeseen by anyone, because if anybody foresaw it, you would never have insured it, we would never have originated the loan. And it spread across the world. Any judgment made on a foreclosure—on a loan being made is because values deteriorated.

And for the first time in the history of this country, people decided that they were going to leave their homes because the value of their homes was below the mortgage amount. Never in the history of this country did that ever happen, and that could never have been assessed in the risk profile. These people didn’t lose their jobs. They didn’t lose their health.

They didn’t lose their marriage. Those are the three factors that cause foreclosure. They left their homes because the values went below the mortgage. That’s what caused the problem. So, I have no regrets about how I—how Countrywide was run. It was a world-class company.

So your tirade about foreclosures and lawsuits is nonsensical and insulting. Countrywide did not cause this problem. We made no loans in Greece.

We made no loans in Ireland. We made no loans in Portugal. This is a worldwide financial crisis that was totally a shock to the system.186 What is Mr. Mozilo’s view on walking away? Does he take responsibility for the loans? P-6523