This is the end of the line for New Century. No standalone mortgage originator can survive the loss of their warehouse lines. Unless an insane white knight tries to step in and catch the knife, New Century will be liquidated. A $6B, 6,700 employee business (at its peak 2 years ago) that will vanish into thin air. It is eerie watching 1998 repeat.
Posts filed under Finance
Eddie Lampert and Sears
Isn't the difference between Eddie Lampert using Sears to extract cash to invest in other hedge-fund like opportunities and Warren Buffett using the float of his insurance companies to invest that insurance companies generating float is a sign of health whereas starving a retailer of cash is a sign of weakness (for the retailer)? Washington Post: Risky Side of Sears: Retailer Is Recast As a Hedge Fund
Or is he saying the Sears is literally Berkshire Hathaway (the dying textile mill that can't justify any ongoing reinvestment?)
Subprime and Alt-A Reading
So this is the week that the mainstream financial media has finally woken up to the collapse in subprime (and shortly thereafter, Alt-A). Why it has taken 2 years to figure this out is beyond me.
Perfectly smart people have been watching every indicator of underwriting quality go far outside of historical norms in 2005/2006 (on the downside) and somehow convinced themselves that it will be OK.
This weekend's best articles:
Marketwatch: Subprime Mortgage Woes May be Spreading
Bloomberg: Subprime Defaults Are `Beginning of Wave,' Bies Says (Note, she still thinks it will stay contained to subprime...sure it wil)
Merrill Lynch: A New Chapter in the Housing Story
Barrons: Subprime Mortgage Bonds Extend Drop as Dealers Cut CDO Funding
"The drop in demand caused yields on subprime mortgage bonds with the lowest investment-grade ratings to double to 8 percentage points over benchmark rates last month, according to New York-based Lehman Brothers Holdings Inc."
NYTimes: Troubles Hit Real Estate at High End
NYTimes: Crisis Looms in Market for Mortgages
Note:
1. The beginning of demonization/backlash: no doc loans have become "liars loans". I am sure two years ago they were an "innovative way to improve homeownership rates among non-traditional buyers" or something like that
2. The recognition that Merrill (and soon all the rest) who went and bought subprime origination arms last year are going to lose their shirts on those transactions. "but we can keep the securitization income coming if we buy them" I believe was the logic at the time. My guess is that there was a misalignment in incentive comp metrics that is the culprit here. Keep securitization income up in your division and get a big bonus. If a couple of years down the line, ML has to take a balance sheet charge, well, we are not exactly going to claw back your bonus...
RGE Monitor:
These guys are great...There is a 14 day free trial, well worth signing up for, if only to read these three articles:
RGE Monitor: Is the Sub-Prime “Garbage†6% or Rather 50% of the Mortgage Market?
EDIT: Add this WSJ / New Century "expose" to the list (note: subscription required). Not much new, just color commentary really.
WSJ: At a Mortgage Lender, Rapid Rise, Faster Fall
Next question for advanced readers:
When does the next credit collapse in high yield happen and what does that mean for LBOs?
Barrons: Beware The Credit Bubble
Rubenstein on private equity
Excellent slide show, posted by PE Hub from Carlyle's Rubenstein on current trends in PE from the Super Return conference. Summary: 1. Times will not continue this good forever, 2. this is nothing near as bad as the tech bubble
Very thoughtful, lots of numbers, hard to argue with.