Light speed
It has only been a couple of weeks since the sub-prime mortgage market became real news, and we got interested enough to write about it. It has been less than a month since sub-prime lender New Century, recently trading at $50, plummeted to near zero and wiped out $3 biilion in owner value. Already, firms great and small are riding in to see if they can profit in the liquidity crunch that is strangling the sup-prime mortgage business, a $1 trillion market accounting for approximately 13% of loan originiations in 2006. WSJ:
Seeing growing turmoil in the market for risky home loans as an opportunity, Goldman Sachs Group Inc. is looking at pushing deeper into the business, ramping up its own subprime-lending operation and pondering the purchase of another.
On the heels of reporting record and expectation-smashing fiscal first-quarter profits that kicked off Wall Street’s earning season, Goldman Chief Financial Officer David Viniar indicated that the brokerage is perusing the subprime sector for fire-sale prices.
Goldman’s plans come amid a meltdown in the subprime-mortgage market, which caters to higher-risk borrowers with sketchy credit records and lower incomes. Lots of big and small subprime players, most notably Irvine, Calif.-based New Century Financial Corp., have been on the ropes, pummeled by defaulting consumers who ended up taking mortgages in the housing boom that they ultimately couldn’t afford. The lenders’ share prices have spiraled downward, in some cases leading to the suspension of trading, and some are now facing scrutiny by federal regulators and possible bankruptcy.
Goldman isn’t alone in hoping to profit from the recent fallout. Wall Street firms already have fingers in almost every corner of the market, bankrolling subprime lenders with credit, packaging and selling bonds backed by their loans and operating their own retail subprime shops.
Some firms have reduced their risks by cutting off troubled lenders’ credit, pushing some to the brink of insolvency — and creating potentially low sale prices for firms like Goldman, which are willing to wager that the market will rebound.
For now, Goldman is a relatively small subprime player compared with rivals Lehman Brothers Holdings Inc. and Bear Stearns Cos., which both are slated to release first-quarter earnings this week and which also are eyeing more opportunities in this sector.
Last night on TV Countrywide Financial (the nation’s largest independent mortgage lender) Corporation’s Chief Executive Angelo Mozilo said that the U.S. mortgage sector is entering a “liquidity crisis.” It was one that was “totally unneccesarily,” a vast “overreaction, [throwing the] baby out with the bathwater.” Now the big Wall Street firms have apparently positioned themselves — instantaneously, it seems — to pounce on the opportunity.
What is happeneing here? We have seen market panics and jitters coming from several places at short notice over the last few weeks — like the Shanghai flu and this meltdown in a corner of the mortgage market, as well as the dueling comments of Greenspan and Bernanke. The market seems to be looking for things to give it the vapors. Is it just the normal panic of the fear-greed template of Wall Street, some sort of hazing ritual for Ben Bernanke, something of substance — some worry about the future that the market can’t yet pin down, such as China’s possibly systemically flaky accounting? — or merely another example of the normal behavior of stock markets, which, as one wag put it, have successfully predicted 9 out of the last 5 recessions? Time will tell.