Once Bitten, Twice Bittten?
Wall Street Journal, February 11, 2008; Page C6
The hard-rock band Mötley Crüe once sang of a toxic relationship, "Girl, don't go away mad; girl, just go away."
Wall Street might want to take the same approach to its failed relationship with subprime-mortgage-related lending. The investment banks have taken more than $100 billion in write-downs -- and half as much in capital infusions from foreign funds.
But Wall Street seems to believe there still is money in failed mortgages.
In fact, firms such as J.P. Morgan Chase and Bear Stearns are sidling back toward their subprime exes, looking to buy some assets on the cheap. Jamie Dimon wants to build J.P. Morgan's mortgage bank and start buying up jumbo mortgage loans and subprime assets, which he thinks now compare favorably to their previous prices.
Bear Stearns believes there are numerous opportunities in acquiring distressed mortgage assets; in fact finance chief Sam Molinaro told Banc of America Securities analyst Michael Hecht that there are too many buyers and not enough sellers of such assets.
At the end of 2007, Lehman Brothers Holdings, which was relatively unscathed by subprime, had more mortgage exposure than it did the year before: $37.3 billion compared with $27.5 billion in 2006.
Does the timing inspire confidence? The track record isn't so hot. Merrill Lynch, for one, bought subprime lender First Franklin even when analysts were already starting to fret about subprime exposures on earnings conference calls.
A slew of new risk-management executives have been installed to help the banks learn from their past lessons. Investors should be asking just how it is going to be different this time.
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