Street's Losses: Jobs, Profits [WSJ]
By SUSANNE CRAIG, MICHAEL HUDSON JAMES R. HAGERTY
August 23, 2007; Page C1
Wall Street firms, which had raced to buy mortgage originators to feed their lucrative business of packaging the loans as securities, marked a retreat from that tattered field yesterday when Lehman Brothers Holdings Inc. said it will close its unit that lent to riskier borrowers.
The closure will add to the thousands of layoffs related to the subprime pullback.
Layoffs announced in last 10 days:
First Magnus Financial 6,000
Capital One Financial's Green Point Unit 1,900
Lehman Bros 1,200
HSBC 600
First Nat'l Bank Scottsdal, AZ 541
Countrywide 500
Closing BNC Mortgage LLC, of Irvine, Calif., is a hit to what had had been a potent profit machine for Lehman, long the leader in selling bonds backed by risky mortgages, often referred to as subprime loans. If other Wall Street firms that own mortgage companies follow suit, a broad profit slowdown may ensue.
"I don't think we're going to see much of a Wall Street presence going forward" in originating home mortgages, said Tom LaMalfa, a managing director at Wholesale Access, a mortgage-research firm in Columbia, Md. Mr. LaMalfa said while he expects Wall Street firms to focus on their traditional roles in packaging and trading mortgage securities, those businesses will be smaller as lenders retain more of their loans as long-term investments or sell them to government-sponsored investors Freddie Mac and Fannie Mae.
For years, mortgages fueled big profits on Wall Street as low interest rates drove a boom in home sales, many of them financed by adjustable-rate loans. Wall Street firms provided capital that let thousands of mortgage firms make loans, many of them to people with sketchy credit.
After lenders signed up consumers for home loans, investment banks pooled the income streams from those loans into bonds called mortgage-backed securities, which they sold to yield-hungry investors world-wide.
By last year, the Wall Street firms had become some of the largest mortgage originators. But defaults have soared since them, causing turmoil in stock and bond markets world-wide. Investors burned by losses have pointed fingers at the Wall Street firms, questioning their role in originating and packaging the mortgages.
Lehman will take a $25 million charge and a $27 million write down on the closure of its second-biggest mortgage originator. The firm will lay off 1,200 people, representing 4.2% of Lehman's total work force. In the last 10 days, more than 12,000 workers have lost their jobs at mortgage originators that include big names such as Countrywide Financial Corp. and Accredited Home Lenders, which laid off 1,600 people yesterday.
"Market conditions have necessitated a substantial reduction in resources and capacity in the subprime space," Lehman said.
The firm will continue to originate mortgages in the U.S. through its Aurora Loan Services LLC arm, which historically has dealt in higher-quality mortgages.
Lehman first bought a stake in BNC in 2000 and bought the company outright in 2004. Lehman packaged more than $50 billion in subprime loans into mortgage-backed bond deals in both 2005 and 2006, more than other firm. BNC and sister lender Finance America contributed to that total, originating $24 billion in subprime home loans in 2005, up from $3 billion in 2001. Finance America merged into BNC at the start of 2006, and loan production by the combined operation fell to $13.7 billion.
"Lehman is probably making a statement that the subprime market isn't going to make quick recovery. This is not a one-month event," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former chief financial officer at Lehman. "You're not going to pull out of something if you anticipate the market is going to come back quickly."
In a report released yesterday, mortgage analysts at UBS AG in New York noted that Wall Street firms in recent years have ridden the explosive growth in subprime and alt-A mortgages as well as in collateralized debt obligations, or CDOs, which repackage mortgage bonds to make them easier to sell to a broad array of investors world-wide.
"The Alt-A and subprime markets will be a shadow of their former selves," the UBS report said, and issuance of mortgage CDOs has plunged. Wall Street will have opportunities for trading in "distressed" CDO securities, the report noted.
Even as the real-estate market slowed during the past year, Wall Street firms spent billions buying subprime lenders. In December, Merrill Lynch & Co. paid $1.3 billion to buy First Franklin Financial from National City Corp., and Morgan Stanley bought Saxon Capital for $706 million. Barclays bought HomeEq Servicing last year from Wachovia Corp. for $469 million. Bear Stearns Cos. bought Encore Credit in February from ECC Capital Corp. Goldman Sachs Group Inc. paid about $20 million earlier this year for a small, two-year-old subprime lender, Senderra Funding LLC, in Charlotte, N.C.
Besides problems with origination, Wall Street has been hurt by its investments in mortgage securities. Bear Stearns, a big mortgage player, recently closed two big hedge funds as a result of subprime woes.
Investors have been particularly concerned about Lehman's role in the mortgage mess. The bank's shares are down about 25% since January. Only Bear Stearns has fared worse; down 29.5%. Rivals Goldman, Merrill Lynch and Morgan Stanley are down 10.8%, 17.9% and 5.2% respectively. Lehman's stock, along with the broader market, rose $1, or 1.7%, to $58.54 as of 4 p.m. in New York Stock Exchange composite trading.
BNC's demise comes just a week before the close of the fiscal third quarter at most Wall Street firms. Investors will be watching closely to see if other firms have similar announcements.
In June, a page-one article in The Wall Street Journal examined BNC's past lending practices. At the time, senior Lehman officials said they were proud of the investment bank's role in helping provide credit to consumers who might otherwise have been unable to buy a home and helping the subprime market grow from a tiny sideline to a major force on Wall Street. "We think it's a business we should all be working to improve, not diminish," the firm said. |
