Sunday, March 11, 2007

New Century (NEW)

The Wall Street Journal Online has at the top of their "column 2" selection of stories, the saga - the rise and fast fall of New Century Financial (NEW). So I would imagine this will be required Page One reading come Monday morning in the actual paper. WSJ (NEW) click here.

The Journal's story tells us many things that you would expect in the tale of a company in the process of collapsing including accounts of wild company parties, big pay packages and even a wrapping of the story at the start and end with two little old ladies who ended up in adjustable rate mortgages which they couldn't pay provided by New Century (NEW).

But beyond the personal and tragic elements of the story, here are two key paragraphs that signal trouble well beyond the confines of New Century and the subprime space:


  • "New Century's swift rise and fall illuminates how Wall Street investment banks such as Morgan Stanley and hedge funds awash in cash helped fuel a binge in subprime lending that prolonged the housing boom. The lenders made themselves vulnerable by relying heavily on outside mortgage brokers and gunning for growth even as the boom faded. The Wall Street banks supplied the money to keep them on a roll, readily gobbling up loans and turning them into securities that global investors were avid to put into their portfolios."
  • "Subprime lenders took cues from Wall Street. Investment banks and hedge funds were ravenous for the riskiest types of loans, whose higher yields made them vital ingredients in investment packages offered to investors globally. New subprime loans made in 2006 totaled about $605 billion, or about 20% of the total mortgage market, up from $120 billion, or 5%, in 2001, according to Inside Mortgage Finance, an industry newsletter."

I've talked in past posts about the "enablers", really the pushers with the deep pockets. The names that come up in the Wall Street Journal article include Morgan Stanley (MS) and Bear Stearns (BSC). But we know that Merrill Lynch (MER), Lehman (LEH) and Deutsche Bank (DB) are knee deep in this stuff as well - not to mention the hedge fund industry.

This is actually the second article I've seen this weekend where the Wall Street brokerages come under fire for their role in the subprime debacle. The New York Times also pointed a big finger of blame at the Wall Street firms (NYT article click here) on Saturday. These paragraphs from the NY Times sum up the case that can be made against the brokers:

  • "Wall Street, of course, was happy to help refashion mortgages from arcane and illiquid securities into ubiquitous and frequently traded ones. Its reward is that it now dominates the market. While commercial banks and savings banks had long been the biggest lenders to home buyers, by 2006, Wall Street had a commanding share — 60 percent — of the mortgage financing market, Federal Reserve data show. "
  • "The big firms in the business are Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley, Deutsche Bank and UBS. They buy mortgages from issuers, put thousands of them into pools to spread out the risks and then divide them into slices, known as tranches, based on quality. Then they sell them."

The finger of blame is already being pointed by both the NY Times and the Journal and its squarely being pointed at the brokerage firms. Eventually Congressional and other Federal investigations are going to be launched. What better deep pocketed group to demonize then the brokers? I think it's bullish game over for most of those stocks.

3 comments:

Blain Reinkensmeyer said...

Jim, this is a must read post, I've been watching NEW for a while now just fall into the black abyss!

Jason said...

Jim, your web site is my favorite blog.

What do you think of this guy's opinion on concerns being over blown? I have been bearish with potential of a recession coming but have been consistently surprised by the bull market..

http://www.marketwatch.com/news/story/subprime-concerns-overblown-y2k-fund/story.aspx?guid=%7B3CF0EEC4%2DAE80%2D432B%2DA40A%2D912A4FC77F32%7D

Jim K said...

Jason, thanks for reading! Deutsche Bank has big bucks at stake in subprime... not sure i would trust Froelich's objectivity, especially after seeing Bear Stearns analyst behavior, even UBS and its slowness to cut the rating of NEW.