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Off-Balance Sheet: Subprime Goes Rancid


The subprime mortgage sector has been beaten, battered, and bruised in recent days, driving the Dow down to a hair above 12,000.


Relax, it's only money. Here in the 'Ville we like to keep things smart, but we also love to laugh. All work and no know how it goes. With that in mind we give you The "Off-Balance Sheet," a place where Minyans can experience humorous takes on the world of finance, personal stories from our Professors and Minyans and all the other stuff that makes life worth living. So take a break from the flickering ticks and dive in.

The subprime mortgage sector has been beaten, battered, and bruised in recent days, driving the Dow down to a hair above 12,000.

New Century Financial (NEW), at the epicenter of the subprime meltdown as the nation's second-largest subprime lender, is expected to file for bankruptcy any moment and the NYSE delisted its stock on Tuesday.

New Century's logo boasts the tagline: A New Shade of Blue Chip. I believe that shade is more commonly referred to as "s--t brown."

Now, the U.S. Attorney's Office for the Central District of California is conducting a criminal inquiry into trading in New Century securities as well as accounting errors, just the latest news to add to the fiasco that is this:

Subprime loans have cost many people and companies dearly, and no one I spoke to on Wall Street was in much of a mood to talk about it.

I wanted to know if there were any opportunities amidst the wreckage; if there were deals to be had, or if vulture investing in this area was simply a bad idea.

I made my way up to Madison Avenue and 80th Street to discuss the subprime disaster with Stu Esposito, the only person willing to sit down with me and talk.

"Justin, we deal in prime only. Nothing less," Stu began.

"So, you've never had any exposure to the subprime market?" I asked.

"I mean, I've tasted it when I was in the military, of course. And I've obviously eaten it in hot dogs and hamburgers, but no, as a general rule, I don't buy anything less than prime when I'm at the market," he said.

Hot dogs? Hamburgers? Thoroughly confused, I consulted my notes to try and make heads or tails of what Stu was talking about.

"So, what you're saying is, you've always insisted on income verification, higher FICO scores, and reasonably substantial down payments?"

Stu looked at me like I had two heads.

"We run a cash-and-carry operation, here. You come in for a porterhouse, you got the money to pay for it, who am I to ask for a W-2?"

Oops. In my rush to meet a tight deadline, I had accidentally scheduled an interview with the head buyer at venerable New York butcher shop, Lobel's.



"Anyway, can I get you anything? A nice filet? A club steak? We also have some beautiful venison today," Stu inquired.

Beyond embarrassed, I ordered a 14 oz. boneless strip steak, two dry-aged Wagyu hip sirloins, and a one-and-a-half pound capon breast. Then I headed back to the office with my tail between my legs and enough meat for the rest of the week.

I turned to Minyanville's all-around financial sage, Kevin Depew, for answers:

I'd recommend a simple marinade for the beef-just a bit of lemon juice, about a cup of olive oil, and a salt-and-pepper rub. As far as the capon goes, I'd go as basic as possible. Let the flavor of the meat take center stage.

Actually, I don't need recipes. I want to know what you think about the subprime mess.

It is a mess. Only prime has the optimal amount of marbling, a nice, firm texture, and the deep red color you want. You start getting into subprime grades like utility, commercial, cutter, and canner, you're not going to be happy.

No, Kevin-the subprime mortgage mess.

Oh. Why didn't you say so in the first place? It all started with hyper-aggressive selling and borrowing during the housing boom. Everyone wanted in because it was supposedly fast, easy money. Now that the bottom's fallen out, the fingers are pointing all over the place. But, if you were a lender, would you give a mortgage to someone who didn't even have a verifiable income? Of course not. But that's what was happening.

Wow. That was really insightful. Thank you.

Now, let me ask you something. A boneless strip steak? What the hell is wrong with you? The bone gives you much more flavor. You obviously haven't spent much time in the kitchen.


Get out of my sight, greenhorn.

I went home, prepared the marinade exactly the way Kevin suggested, and broiled the boneless strip at high heat for seven minutes on each side.

It was delicious. That Depew guy really knows what he's talking about.
No positions in stocks mentioned.
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