Angelo Mozilo's nine lives may be about to run out. So far the CEO of Countrywide (NYSE:CFC) has avoided the most severe taint from the collapse of his mortgage company and its questionable practices.

The State of Illinois, the land of Lincoln, will bring civil charges against Mozilo and the firm he started. According to The Wall Street Journal, In a draft of the complaint, Illinois alleges that the company engaged in "unfair and deceptive practices" in the sale of mortgage loans.

One of the main pieces of the complaint is that mortgage brokers pushed loans on people, even it they could not afford them.

Of course, as is always true with charges bought by attorneys general, there is some politics behind the claim. There have been a number of Countrywide foreclosures in the Illinois.

To some extent the politics do not matter. Based on other investigations of Countrywide, it appears that management did quietly push its people to move loans out like cars off an assembly line.

What is most troubling is that no one in government anywhere caught onto the practice earlier.

Douglas A. McIntyre is an editor at 247wallst.com.

The New York Times reports that Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) have a tiny sliver of capital to support a mountain of mortgages. To put it in perspective, their level of borrowing is almost twice that of the enormously over-leveraged investment banking and hedge fund industries. With the collapse of the housing market, Freddie and Fannie are in trouble. And when you get to the scale of these two, so is America.

As I posted last month, it could cost $1 trillion to bail out Fannie and Freddie. These hybrid organizations are a key cog in the mortgage industrial complex (MIC) that has gotten the world into its current capital crisis. Fannie and Freddie buy "conforming" mortgages from their originators and then package and sell the mortgages as securities. But these two have a mere $83 billion in capital to support $5 trillion worth of debt and other commitments.

This 60-to-1 ratio is almost twice the 32-to-1 ratio of the highly leverage investment banks and hedge funds. And like any company with hard-to-value assets, Fannie and Freddie have unrealized losses. In their case, those total $20 billion -- they've already taken $9 billion worth so far this year. By 2007 they had guaranteed or invested in $717 billion of subprime and Alt-A loans, up from almost none in 2000. And many of those are not worth that much.

Countrywide Financial Corp. (NYSE: CFC) Angelo Mozilo sure comes across like a selfless champion of the underdog on his company's website, which points out that he founded the company in 1969 "on the principle that every family in America desiring to achieve the dream of home ownership should have the opportunity to do so." This year, that dream turned into a nightmare for many Countrywide borrowers and investors.

Shares of the Calabasas, Calif.-based company have slumped 77% this year as the subprime mortgage meltdown worsened. Many investors have been hurt, with the exception of Mozilo. The New York Times reported in October that SEC had opened an informal investigation into the timing of Mozilo's stock sales, "which allowed him to gain more than $132 million in the months before the price plummeted amid the deepening mortgage crisis."

The company threw its beleaguered borrowers a bone on October 23, allowing about 52,000 customers with subprime loans to refinance into prime or government-backed mortgages through next year, and gave more affordable terms to another 30,000 either behind or in danger of becoming behind in their mortgages. As Senator Chris Dodd (D-CT), a candidate for president, noted, the problem extends well beyond the people the company has agreed to help.

UBS (NYSE: UBS) is the latest big bank claimed by the subprime mortgage fiasco. It will write-down $10 billion in assets. It is also bringing in an investment of $11.5 billion, lead by the government of Singapore.

According to Bloomberg , "UBS scrapped a forecast for a fourth-quarter profit and may post a full-year loss."

"The industry has been moving to more aggressive markdown rates'' on subprime-related assets, Kinner Lakhani, a London- based analyst at ABN Amro told the news service.

The news raises two questions. The first is whether the action by UBS will precede more write-downs at big US banks, probably in the fourth quarter. It is certainly a sign that the values of subprime assets are not better than they were at the end of the last quarter. And they may be getting worse.

The other, more vexing question is at what point will investments from Asia and Middle Eastern interests, flush with cash, become at cross purposes with banking interests? Obviously, US financial authorities would not allow a fund controlled by the Singapore government to own a big US bank outright. But in a crisis, that may mean that the US government would have to step up with capital of its own.

Douglas A. McIntyre is an editor at 247wallst.com.

Today's Wall Street Journal reports on the sector that is handing some big losses to value funds: financials.

Companies like Merrill Lynch & Co., Inc. (NYSE: MER) and Citigroup Inc. (NYSE: C) have seen their stocks tank in the wake of the subprime meltdown, and value investors who have liked the low P/Es and attractive yields are holding the bag.

The Journal reports that "The average large-cap value fund is down 2.6% so far this year, according to Morningstar Inc. But that average disguises double-digit losses at a number of well-regarded value funds. Among them, Touchstone Large Cap Value Fund is down 32% and the Hotchkis & Wiley Core Value Fund has lost 15.1%. Investors in Weitz Value, run by veteran value manager Wally Weitz, are down 14.2%. That contrasts with a 0.9% increase in the Standard & Poor's 500-stock index (including dividends) and an 8.2% gain in the average large-cap growth fund."

I consider myself a value investors but the beating that they've taken on some of these stocks underscores one of the pitfalls in the regimens of many investors: over-reliance on ratios and cash flow analysis, without really understanding the fundamentals that drive a company and its industry. A lot of very smart people were predicting subprime trouble, and some had the foresight to short these financial stocks -- but it appears that some mutual funds were blinded by low P/Es and high ROE's.

But in the end, those are just helpful tools for understanding business fundamentals, something many investors ultimately ignored.

Another day, another bad headline for Countrywide Financial (NYSE: CFC). The New York Times is reporting that Countrywide has received a federal subpoena related to possible abuses of bankruptcy laws in Florida.

One of the issues relates to excessive and unwarranted fees that some say Countrywide is charging troubled homeowners. As I blogged earlier this month, one recent study found that roughly half of mortgages going through Chapter 13 bankruptcy contained questionable fees.

Countrywide Financial may have accomplished something pretty unique: exploiting its customers and behaving in an ethically questionable manner while also losing money hand over fist for its shareholders.

It's kind of like a baseball player using steroids and hitting .220 with 3 home runs.

Either way, CEO Angelo Mozilo's tan still looks fabulous.

Forget crooked mortgage companies. Forget greedy speculators. Forget lax credit ratings agencies. The real reason for the housing crisis is the media.

Toll Brothers Inc. (NYSE: TOL) Chief Executive Robert Toll seems to think that the housing crisis would improve if the media didn't write about it so much.

"Perhaps as the presidential campaign heats up and moves to the front page, negative articles about housing will move off the front page," the New York Times quotes Toll as saying.. "Then, hopefully, the positive underpinnings of low interest rates, low unemployment and a decent economy will raise new-home-buyer confidence."

Fat chance of that happening.

AIG (NYSE: AIG) is recently down $0.56 to $63.28. Smith Barney says, "AIG has yet to provide investors with an earnings release date for 3Q '07 results. In the wake of the subprime meltdown, investors are eager to asses the fate of AIG's $29 billion of subprime mortgage exposure and its credit guaranty business." AIG call option volume of 13,468 contracts compares to put volume of 36,042 contracts. AIG November option implied volatility of 44 is above a level of 33 from last night and above its 26-week average of 22 according to Track Data, suggest larger near term risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Lenders are feeling the heat to modify loans, but as the numbers mount loan servicers are finding they are helping more people but falling behind on the percentages. For example, Larry Litton of Litton Loan Servicing told USA Today that historically his company has been able to help 60% of homeowners avoid foreclosure, but today because of tougher lending standards, falling home prices and poorly underwritten loans, he only can modify about 45% of the bad loans on his books.

Countrywide (NYSE: CFC) does feel the pressure, and is the first major lender to announce that it will refinance or modify $16 billion in subprime ARMs that will reset through next year. Now if other lenders and investors would jump on that bandwagon maybe we really would have a solution and prevent a further deterioration in the housing markets. Countrywide will contact borrowers who are current on their loans but facing a rate reset to discuss options. It expects to refinance about $10 billion in loans and modify another $4 billion.

Countrywide's solution answers what the FDIC wants. Sheila Bair, chair of the FDIC, told USA Today that she wants lenders to covert people to fixed rates now who are paying on time before the ARM resets. That's 80% of people currently in ARMs that will be reset in the next year.

Federal Reserve Chairman Ben Bernanke doesn't see himself as Wall Street's sugar daddy. That point is abundantly clear from a speech he made Monday in New York.

Although the Federal Reserve can seek to provide a more stable economic background that will benefit both investors and non-investors, the truth is that it can hardly insulate investors from risk, even if it wished to do so. Developments over the past few months reinforce this point. Those who made bad investment decisions lost money. In particular, investors in subprime mortgages have sustained significant losses, and many of the mortgage companies that made those loans have failed. Moreover, market participants are learning and adjusting--for example, by insisting on better mortgage underwriting and by performing better due diligence on structured credit products. Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.

That sound like tough love, doesn't it? Bernanke certainly seems to be sympathetic to the plight of average people and said the Fed will take action "as needed." There may not been a need for the Fed to do anything at its upcoming meeting. September retail sales were pretty strong and data indicates that consumers are weathering the economic uncertainty.

Bernanke doesn't mince words. He said "further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year." But does that mean that more interest rate cuts are coming? I am not sure.

People shouldn't expect Bernanke to deliver them a rose garden of continued interest rate cuts which he clearly has no interest in promising.

You just have to love the U.S. -- marketing runs the majority of the world's largest economy, and when subprime lenders began using low interest rates to push shoddy mortgages onto clueless homebuyers years back, millions jumped on the bandwagon. If you weren't flipping houses for a living, you were getting into a much larger home with the feeling that those larger payments and mortgage term resets were years off. We're here now, and foreclosures are up while homeowners are losing their collective shirts. Is it the housing equivalent of the Titanic sinking? Nah -- but that's what many of the media portray it to be.

But, in perfect "we can save this country" fashion, a few 'Crats on the Hill have decided that the U.S. needs a 'mortgage czar' to protect us all from getting in over our heads with goofy mortgages. The prediction is that foreclosures will continue to escalate, so some lawmakers want $200 million to help those in over their heads make sure they don't lose their homes.

You have to love academia. With the subprime meltdown in full swing and Americans with ARM and/or pay-option mortgages finding their homes in jeopardy, Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University's Stern School of Business have come out with a 65-page paper full of equations to demonstrate that no, actually these so-called toxic mortgages are the best ones out there.

The authors of the study argue that, in a perfect world, these mortgages are great -- sounds a little bit like what some people say about communism. Pay-option ARMs work great if people behave rationally -- act in the own best interests, behave with self-discipline, and pay more than the minimum whenever possible.

That sounds like most of the subprime borrowers you know? Yeah, that's what I thought. The professors say that, with proper education, these loans could be attractive. According to Piskorski:

"Obviously people are to some extent irrational. But if you want to ban this type of contract, you should really weigh the benefits and the costs. How much could you educate people? Make people understand them. Provide them with software. Make a federal law that requires the lender to reveal what this contract is about."

But most people know shockingly little about finances. According to a Jump$tart survey, "Only 14.2% [of high school students] felt stocks are likely to have higher average returns than savings bonds, savings accounts, and checking accounts over the next 18 years in spite of the fact that there has never been an 18 years period when this was not true."

So educating people about pay-option ARMs seems a little ambitious.

The New York Times [registration required] reports that the subprime meltdown has zipped across the Pacific to wipe out the fortunes of Japanese housewives who trade currencies after putting their children to sleep. Betting an average of $9.1 billion a day -- 20% of daily foreign exchange (FX) volume -- on a decline in the Yen relative to the dollar, many of these housewives were wiped out when the August credit crunch caused U.S. hedge funds to panic -- driving up the Yen's value and tanking their trades.

Japanese online investors lost $2.5 billion trading currency in August. And for many Japanese households, housewives' FX trading had been kept in the closet. Japanese tradition frowns on making money through means other than hard labor -- such as market speculation.

But this taboo is out in the open thanks to Mayumi Torii, according to the Times, a 41-year-old mother of one who said she earned $150,000 since she started margin trading in currencies early in 2006. Torii now appears on TV promoting her FX Beauties Club so she can "stand on my own economically," a necessity she discovered after her first marriage ended in divorce, and she and her son had to live off her meager savings. "I never want to feel that vulnerable again," she said.

Thornburg Mortgage Inc. (NYSE: TMA) Chief Executive Larry Goldstone said there is a "crisis of confidence" in the mortgage market.

No kidding.

Shares of Thornburg fell about 9% after Goldstone made that insightful comment on CNBC. They are down 45% for the year amid concerns about the subprime mortgage meltdown. Thornburg sold about $20.5 billion in mortgage-backed securities today to return to "business as usual" -- whatever that means.

Worries about subprime mortgages continued to weigh-down the market, as did the drop-off in oil prices caused by weather forecasts that indicated Hurricane Dean wouldn't hit the oil-producing areas of the Gulf of Mexico. The Dow Jones industrial average and the Nasdaq Composite Index managed to hang onto positive territory for now as investors continued to hope -- make that pray -- that Fed Chairman Ben Bernanke will eventually cut interest rates.

Analysts, traders, typical investors and other relevant market watchers - while remaining attentive to what appears to be a shift in fundamentals that suggest new market conditions - are also keeping one eye on the impact of a rule change.

In late July, the U.S. Securities and Exchange Commission [SEC] changed the "downtick" rule. The new rule makes it easier for investors to place trades in the direction of a sudden downward move in a stock. For example, under the old rule, XYZ stock had to rise to $19.99 after falling from $20.00 to $19.98 before it could be sold. Under the new rule, XYZ Stock could be sold at 19.98 if it dropped from $20.00 to $19.99 and then to $19.98.

Some analysts say the rule change has increased volatility - and the scope of sell-offs - than would typically occur. These strategists argue that the new rules allow short-sellers "to pile on" and create a self-fulfilling event: a stock price that's falling, not based on a material event, but because others or a wave of short sellers are mass-selling the stock.

Still, other analysts argue that the new rule has not served as a trigger event. They argue that: 1) short-selling has always occurred, and 2) there may be one (or several) material events that have, prompted the stock's decline at that moment.