Off With Their Heads! The Fallout Of The Sub-Prime Mess

By • Nov 5th, 2007 • Category: Pure Content


This past weekend, Chuck Prince lost his job at Citibank due to the sub-prime mess. Last week it was Stan O’Neal.

Many say that Bear Stearns’ James Cayne is next.

What do all three of these firms have in common, besides their sub-prime woes? All three received clean bills of health for the year ended 2006, including clean opinions from their external auditors on their internal controls. That’s not so long ago.

Merrill and Bear Stearns share Deloitte as an auditor, (who also had American Home.) Citibank has KPMG (who also has Countrywide.) Merrill and Citibank have already seen suits filed over their losses. It doesn’t take long…

So why are these auditors still presiding? Didn’t they miss the boat on this mess?

In particular, look at Bear Stearns press release of less than a year ago. They promoted the heck out their involvement in the mortgage business. In their 2006 annual report they proudly reminded everyone of their #1 rankings by Thomson Financial Services for US Mortgage-Backed Securities, US Mortgage Backed Securities-Residential, Whole Loans, and Adjustable Rate Mortgages.

BEAR STEARNS TO ACQUIRE ECC CAPITAL’S MORTGAGE ORIGINATION UNIT
Acquisition is Next Step in Bear Stearns’ Strategy of Vertical Integration in Mortgage Business

October 10, 2006 — The Bear Stearns Companies Inc. has agreed to acquire ECC Capital Corporation’s (NYSE: ECR) mortgage banking platform, the two companies announced today. Under the agreement, Bear Stearns’ mortgage bank subsidiary, Bear Stearns Residential Mortgage Corporation, will purchase the subprime mortgage origination platform of ECC Capital’s subsidiary, Encore Credit Corp. Encore Credit, specializing in subprime mortgage origination, will operate as a separate division of Bear Stearns Residential Mortgage Corporation.

“The acquisition of ECC Capital’s origination unit will give Bear Stearns a substantial stake in the subprime lending business,” said Jeff Verschleiser, a senior managing director in the mortgage department at Bear Stearns. “We continue to diversify our product mix to give independent mortgage brokers additional options through Bear Stearns Residential Mortgage Corporation. With our advanced technology, sophisticated risk management systems and capital markets expertise, we are well positioned to continue to broaden our already formidable mortgage franchise.”

Shabi Asghar, ECC Capital’s President and Co-CEO, said, “As part of the Bear Stearns team, the Encore Credit sales force can now expect to have access to more competitive loan pricing, to have a broader product menu and to be integrated into Bear Stearns’ state-of-the-art production platform technology, which will provide our brokers with greater efficiency and service. Our origination business seems to be a natural fit with Bear Stearns’ expansion in the subprime market.” Mr. Asghar will be President and CEO of the business unit after the transaction closes.

As part of the acquisition, Bear Stearns will take over Encore Credit’s operating centers in Irvine, Cal., Downers Grove, Ill. and Glen Allen, Va. Bear Stearns will also acquire selected portfolios of whole loans. Encore Credit will leverage the benefits of Bear Stearns Residential Mortgage Corporation’s existing technology, legal and compliance infrastructure. Bear Stearns Residential Mortgage Corporation expects to employ most of the personnel of Encore.

This acquisition is the latest addition to Bear Stearns’ market-leading mortgage franchise. Bear Stearns Residential Mortgage Corporation began operations in April 2005 to provide mortgage brokers with an easy, streamlined solution for financing home loans. With an innovative technology platform called BearDirect.net, it now lends some $600 million per month in primarily Alt-A loans. Coupled with EncoreCredit’s mostly subprime mortgage origination, the combined platform will generate over $1 billion in loans per month.

“Bear Stearns has been buying loans from ECC Capital for over three years and the performance of its loans has been favorable compared with other originators in the marketplace,” Mr. Verschleiser said. “Encore has a very strong sales organization, and as part of Bear Stearns Residential Mortage Corporation we will be able to expand Encore Credit’s product mix and improve its pricing and funding costs.”

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3 Responses »

  1. I don’t think O’Neal’s efforts to contact Wachovia regarding a M&A without Board approval helped his cause any!

  2. [...] I warned that the CEOs and their Big 4 buddies should be nervous, too.   The Big 4 are now inextricably tied to their clients’ fortunes. Lawsuits are flying fast and furious as soon as any particular situation appears to be deteriorating. Let’s review the scorecard: From November: [...]

  3. [...] what I’ve been saying all along about firms like AIG, Lehman, Fannie Mae and Freddie Mac,  Merrill Lynch, Goldman Sachs, and Morgan Stanley. There have been a lot of false starts, last minute deals, and [...]

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