Tuesday, August 07, 2007
Leverage Cuts Both Ways
Fifty sub-prime lenders have gone out of business and last week American Home Mortgage filed for bankruptcy protection and finished at 44 cents. AHM was a $22 stock in late June, and as high as $36 in the last year. This shows how quickly things can go. There is much that is still unknown about the sub-prime mess, but the spreading contagion to other areas of the credit market appears to be underway. Leverage is great when credit is cheap and risk is low, but as risk and rates rise, the outcome of massive global leverage grows ever more ominous. I suspect that the Bearns bank, Wall Street's fifth largest, may be in danger of swift collapse. Hope I am wrong.