Tuesday, July 31, 2007

Floyd Norris: Notions on High & Low Finance

It made money until it failed.

So goes the story of American Home Mortgage, which today disclosed that it is having a liquidity crisis. The stock fell about 90 percent. It will not be able to come up with the money to fund hundreds of millions in loans.

For those who sold the stock in recent weeks, the New York Stock Exchange and the S.E.C. may want to ask just what they knew and when they knew it. We are told today in the release that the company has been getting margin calls on its mortgage securities for about three weeks. During that period, the stock fell from around $17 to $10 without any announcement from the company. Today it is around $1.

On June 29, the company had disclosed that it would report a loss for the second quarter, but promised to keep paying dividends and said its net worth would actually go up in the quarter. (Now there is a wonder of modern accounting.) When it made that announcement, it did not mention that its chief investment officer had resigned the day before. We learn that from an S.E.C. filing today.

Why did he quit? And how did the company decide that fact was not worth mentioning then?

This may not be a subprime issue, by the way. In his last earnings conference call, in April, Michael Strauss, the chief executive, said most of the company’s delinquency problems were coming from people with high credit scores, who had been received high loan-to-value loans and had not had their income verified.

I would, by the way, love to talk to anyone who had a loan commitment from American Home, and now will not be able to borrow the money.