March 12, 2007

New Century Financial Now Has A Market Cap of $92 Million and Owes $8 Billion. Now That is Leverage Baby!

No one can blame New Century Financial for not practicing what it preaches. As of Monday, the market cap of New Century (NEW) is now down to $92 Million after dropping another 48% during the trading day. The news only got worse as the day went treading along. The revelation that many creditors such as Bank of America and Citigroup are ready to collect their debts and essentially pulled a margin call on NEW sent the stock even lower. A company spokeperson stated the following about paying its obligations to lenders:

“We ain’t got the dough right now but come back tomorrow and we’ll hook you up with a subprime loan baby!”

The Debacle

In what has to be the most amazing no-doc-suicide-negative-amortization-zero-down-one-percent loan ever, NEW was able to leverage a company worth $92 million into $8.4 billion of debts. This from a CNN article posted today:

“Irvine, Calif.-based New Century said that all of its own lenders are cutting off financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations, which could reach $8.4 billion. The company's market value has shriveled to only $178 million.”

The market value was $178 million before it fell another 50 percent today when trading resumed. This implosion isn’t a shock but the key players involved is:

“The company's SEC filing could shake up the financial sector. It mentioned financing agreements with many top Wall Street firms, including Morgan Stanley (Charts), Citigroup (Charts), Barclays Bank (Charts), Bank of America (Charts), and Credit Suisse First Boston Mortgage Capital, a unit of Credit Suisse Group (Charts), as well as the mortgage arm of Goldman Sachs (Charts).”

The permabull argument that the subprime implosion would be contained to the high-risk sector is now going mute. Look at the list above. Does this list look like low-key players? Now that BofA and Citigroup are about to break some knees and bust some heads over at NEW do you think this won’t spread like a flu virus? If you were owed $8 billion would you let that slide as if a granny cut you off on the 405 freeway? Somehow, I don’t feel that Goldman Sachs and Barclays are in the business of handing out charity.

The Saga

I’ve talked about the NEW debacle in many posts for the last month. So if this still sounds like a company you would want to work for, they are still hiring:

In addition, I was browsing through their 2005 company statement (since the 2006 isn’t out even though KPMG has audited the company) and you can see where the fun begins in this Ponzi scheme. Take a look at the below:

Two major things I want to point out that were non-existent in 2004 but reared their head in 2005 (and who knows what this looks like in 2006). First, we have the emergence of the 40-year mortgage. Why anyone would get a 40-year mortgage is beyond me since the monthly nut payment pretty much stays the same compared to a 30-year traditional mortgage. The other item I draw your attention to with my amazing MS Paint skills is the starting of interest-only mortgages. The combination of these two speculation vehicles essentially converts any homeowner into an investor whether they actively acknowledge it or not.

What happens when the price of your home goes down? What will happen if we see year-on-year negative returns? Take a look at NEW stock and you’ll find out; it is a house of cards built to collapse and keep in mind we have yet to see an actual serious correction in the housing market. All the pundits seem to think that 8 months of slow appreciation is a true correction. No, a true housing correction is year-over-year of negative housing news, depreciation, and a sentiment that housing is no longer an investment. The amount of real estate investing books, late night infomercials, and mainstream media pundits still touting real estate gives us a litmus test that the market is still saturated and needs to be purged.

Let us not forget that there are other subprime players and billions of dollars at stake. This is merely the beginning and if I were you I would listen to Scooby Doo.

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