Most money is running from the subprime market as fast as its can. Not so Goldman Sachs. The firm’s CFO indicated that the low-end home loan market may represent a huge investment opportunity as the stock prices of some lending companies have fallen over 80%.
A Merrill Lynch analyst made the point to the WSJ that the current turmoil is "exactly the kind of dislocation" brokers look for. The Mortgage Bankers Association was quoted by MarketWatch as saying that "the rate of homes entering the foreclosure process hit a record 0.54% and the delinquency rate on U.S. home loans leaping to 4.95% from 4.67% three months earlier."
But, it is fair to ask a question about whether Goldman Sachs is that much smarter than the management at New Century (NEW) or Accredited Home Lenders. More to the point, is GS smarter than GE (GE) and GMAC (GM), both of which have some trouble with the subprime portions of their loan portfolios. Goldman has the advantage of looking at the market post-collapse, a critical perspective that these other companies did not have.
There is a temptation to think that the researchers and bankers at the world’s premier investment bank can out-think almost everyone else in the financial world.
That may not always be the case. Goldman can get burned just as badly as anyone else It just does not happen very often.
In the subprime market, GS should be careful where they tread.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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