March 11, 2007

Bear Stearns Subprime Mortgage Analyst Called Out by NY Times

In today's New York Times article "Crisis Looms in Market for Mortgages", reporter Gretchen Morgenson takes a Bear Stearns subprime mortgage company analyst to task for issuing a positive report about subprime mortgage lender, New Century Financial Corporation, whose stock subsequently dropped over 75% shortly after (for you visual ones, see the Yahoo Finance chart below).

(Note: Bear Stearns had upgraded New Century's stock on March 1)

It turns out a large number of New Century's customers were defaulting on their loans, forcing New Century to stop making new loans, leaving the company in need of an emergency cash infusion from outside sources to stay in business. The article goes on to tackle the bigger issue of the $6.5 trillion mortgage securities market and how increasing lax standards for issuing loans has created greater risk for massive defaults.

So, was this just a bad read on the part of the Bear Stearns analyst or is there a bigger issue here? For whatever it's worth, it turns out that Bear Stearns finances a portion of New Century's business. Not necessarily a problem in itself as Bear Stearns, like any large investment bank, probably does business with most of the large companies in the country, but it certainly does sniff of similarities to the Dotcom boom when Wall Street analysts were pumping up stocks of companies that their investment banks had business relationships with. And we all know what happened to the Dotcom boom:


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