New Century Insiders' Stock Sales Were Prime

If you think lending money to people who can't afford to pay it back is a bad business idea, you don't know much about the stock market.

As the scandal breaking at New Century Financial (NEWC) shows, subprime mortgage lending can be very profitable ... for some.

After all, when interest rates were just 1%, the vig on a $1 million loan only came to $10,000 a year. There are people on welfare who can afford to pay that, even if there is no chance whatsoever they could ever repay the principal. And there are plenty of analysts on Wall Street who won't notice the problem till it's too late.

The trick, when making bad loans, is to get out before the loan book hits the fan. Which brings us to New Century.

The company has admitted to bookkeeping "errors" going back to early last year. It admits bad debts are far higher than thought. Lenders have cut off funds, the company has suspended new loans, and bankruptcy is an imminent possibility. The shares have collapsed in the scandal and were suspended this week at just $1.66.

The Justice Department and the Securities and Exchange Commission are both investigating. Class-action suits are flying, and New Century has received a grand jury subpoena. Among the issues being examined are insider stock sales.

One thing that has drawn the authorities' attention is that in the eight months leading up to the recent disaster, New Century insiders were dumping stock like it was going out of fashion.

Which, of course, it was.

Between August of last year and early February, directors and executives, a group usually known on Wall Street as "the insiders," sold $29 million worth of shares to ordinary investors and mutual funds, a group usually known as "the suckers."

Average price paid: $36.29 a share.

Today, of course, those shares seem pretty much worthless.

But that's not the half of it. It's not even a third of it. I looked back through company filings dating back to early 2003 -- just around the time New Century stock first began skyrocketing on Wall Street euphoria about all the customers who could afford the cheap, upfront interest payments on adjustable-rate mortgages.

Guess what? Over the past four years, New Century insiders cashed out a remarkable $103 million in stock. At an average price of $42.56 a share. That's some getaway ... er, "exit."

Altogether they unloaded 2.4 million shares. By comparison, New Century currently has about 55.47 million shares available for trading.

Special mention goes to the three co-founders and top executives. Vice-Chairman-Finance Edward Gotschall sold $39 million in total. Even after paying for share options, his net profit comes to about $32 million.

Chief Executive Robert Cole cashed out $29.64 million. All but a couple of million was profit.

And Vice-Chairman and Chief Operating Officer Brad Morrice sold shares for $18 million, pocketing more than $13 million after stock option costs.

None of this is any proof that the insiders did anything illegal. That would require proof that they knew about the accounting problems and the looming cash crunch at the time of the sales. The company, of course, isn't commenting on anything related to the investigations. Some of these stock sales go back four years.

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