Monday, May 28, 2012

Why Einhorn Owned New Century Financial

Fascinating; I had forgotten that he was on the other (losing) side of this trade from me.

"We have a company in our portfolio, New Century Financial (NEW), that turned a wonderful non-capital intensive business, the origination and sale of mortgages, and reinvested the cash flows into a mediocre capital intensive business of holding mortgage loans. Worse, they went into the capital markets to raise additional capital to focus on the capital intensive opportunity. I thought this was such a bad idea that I joined the Board with the goal of unwinding this decision and to free the valuable service business from the investment business. It is too soon to discuss my progress."
That was from David Einhorn’s Speech [pdf] at the Value Investing Congress, Friday, November 10, 2006. He was right that the company made a mistake by expanding into the business of owning/holding mortgage loans.

However, it is also clear from his comment (and the fact that he owned a big stake in the company) that he completely missed what was going on in the mortgage market; both in the New Century portfolio and in the entire U.S. market. He did not resign from the board until March 2007.

I've said before, I think that Manhattan-based investors were more likely to miss what was going on in the rest of the country. See my previous posts about this:


Stagflationary Mark said...

Jim Cramer was spot on in 2007 though.

And when I say spot on, I mean from a heckling perspective.

Not only did he refer to New Century Financial as New City Financial, he did so while trying to tell us that the subrprime mess was "calm". ;)

CP said...

Here we are, five years later.

I would've bet money that he would be off the air by now.

He is a total B.S. artist with no substance.