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A Subprime Checklist

Jim Cramer

No doubt inadvertently, The Wall Street Journal has given us a fabulous checklist this morning to use when trying to isolate the subprime survivors from the catastrophes. Buried in the obituary for New Century(NEW) was this paragraph:

The lender now is plagued with a surge of bad loans, costly obligations to buy back bad loans already sold to investment banks and inadequate reserves. It also faces regulatory probes and shareholder allegations that its officers and directors sold shares at inflated prices. The company has said it is cooperating in the investigations.

So, if we are looking for a bottom in one of these -- say IndyMac(NDE), because that one's the most adamant that it shouldn't be lumped into the parade of horribles -- we need to see:

1. No surge of bad loans
2. No costly obligations to buy back loans
3. Adequate reserves
4. No regulatory probes
5. No massive insider selling before the decline

I'm going to try to get in touch with some of the major subprimes today to see which ones can take that five-part challenge. I bet none of them can, but if they can they're certainly worth taking a shot at down here.

Don't know the answers yet. If you do, please don't hesitate to email me.

Random musings: If there are a lot of homes that are being defaulted on that people live in, that's rather surprising because if they have jobs they can usually make it, and jobs are still very plentiful. Speculators obviously have been the equivalent of margined out.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider New Century Financial to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.