In the wake of New Century’s bankruptcy, Robert Lindsay gets his hands on the official list of the company’s biggest creditors. At the top of the list is Goldman Sachs, followed by Credit Suisse and a who’s-who of other big investment-banking names: Morgan Stanley, Deutsche, BofA, UBS, Lehman, Citigroup. Loan house C-Bass is in the #3 spot.
Most of these creditors have secured loans to New Century, and one of them, Barclays, tells Lindsay that “the vast majority of our exposure to all US sub-prime lenders is fully collateralised and short-term, pending distribution. We do not anticipate any material losses to arise from our exposure to the sector.”
There’s no indication of how big New Century’s obligations are, and my feeling is that by the time the company’s assets are sold off, the secured creditors are unlikely to be seriously hurt. But for those of a conspiratorial bent, Lindsay notes that Goldman executive Kathleen Brown “left late last Friday without any explanation”. Did she have anything to do with New Century? It’s unclear.
Dumb story. Misses the point entirely, both on creditors and on the mortgage loans. Assumes that a bankruptcy means nothing is worth anything – whereas in fact bankruptcy is merely a matter of insufficient liquidity. For one-trick pony subprime mortgage lenders, it just takes a drop in loan prices of a cent or two on the dollar to kill earnings, and a couple of months to eat up all the cash.
First, the loans. What could they be worth? He’s right, we won’t know until they’re sold. But there’s some pretty damned good indications out there, if only people knew how and where to look.
Check out two other lenders in crisis, Accredited and Fremont. Both had fire sales of loans last month as liquidity issues or bankuptcy hit them. Fremont got 96.5 cents on the $ for its $4bn of loans, Accredited 94.4 cents for its $2.7bn – based on the loss on sale of $140m and $150m they respectively announced. In fact, the prices might even be a cent higher, since the cost of making the loans in the first place is a cent or two.
And the chances are there are no or few early payment default loans in here, or in the ones New Century has handed out as collateral – after all, it was because they had to buy these poorly performing loans back that helped put them in a liquidity crisis to start with.
So what does this mean for the creditors? Probably nothing. It’s doubtful any had lent the full amount of their credit lines. They’ll only get into trouble – based on Accredited’s and Fremont’s prices – if they have lent more than 95% of the credit line.
Of course, this assumes they manage to sell the loans – the bankruptcy court might have called all NC assets back in. Not sure how that affects collateral on loans, or how the banks then have to report them – but they remain the largest creditors with assets there to pay them back – though over a longer period of time.
You expect ANYONE with more than 2 functioning brain cells to believe that Fremont and Accredited, through the entire subloan debacle (still unfolding) are only losing pennies per dollar?
Puh-leeze! There’s been no detailed audit on these holdings, no marked-to-market of their paper. We know many of their loans were made in excess of 100% LTV, that prices have softened, and will soften further as these REOs come back on the market. That’s before we get into the costs of repossession and sale.
Oh, and both of thgese companies just had their auditor, Grant Thornton, resign as Auditor. “Grant Thornton LLP resigned as auditor of Fremont General Corp., the lender ordered to stop offering subprime mortgages, after the company failed to provide information needed to complete a review.” Uncooperative, incomplete — and thats before we get to the “suspicious” documents. Grant Thorton bailed on Accredited also.
Why would anyone believe Fremont or Accredited’s numbers or forecasts?
Speaking of prime real estate, I own a bridge in Brooklyn for sale. Primo location! Easy finacing available. I can give you a good price . . .
Of course they’re losing more over the course of the crisis. I didn’t say these lenders were ONLY losing a couple of pennies per dollar, finito. I said it only TAKES a couple of pennies per dollar to push these lenders into an earnings loss. That doesn’t mean, over the course the crisis (still unfolding) that they won’t lose more. But nor does it mean that all their assets are worth bugger all.
The loan firesales last month are just a handy snapshot for gauging what price New Century might get, and how on the hook its creditors are. I’m making assumptions, true – like the buyers taking at least a half-decent look to check the crappiest of the crap loans weren’t in there. That’s the only way to explain the price – unless the buyers were idiots. Which, I grant you, is possible. But I kind of assumed they, too, realised there was a bit of crisis going on.