Maven: Singed by the Subprime Fire

This is not the end of the markets as we know them.
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Seminal events are great, and every decade should have one. Well, lucky us, then, huh? In the past month, we've had two of them: the collapse of Asian markets, which was supposedly going to topple all others; and the apparent folding of a subprime mortgage lender, which will pull all financial firms asunder.

So little time, so many pivotal events.

Do you sense a telltale note of condescending scorn from The Business Press Maven, who is writing from Kansas today and cannot even find peace as he watches the sun rise over the tall grass plains? Is that a prairie dog I see, a vole or just spots in front of my eyes from reading too much nonsense?

The problem, as it frequently proves to be, is overstatement in the business media.

New Century

(NEW) - Get Report

, the subprime lender that has all but had its death warrant signed, is no

Long Term Capital

, the failed hedge fund in the 1990s that was originally portrayed as being the first of many, the event all others hinged on, the inflection point for all.

Inflection? Give The Business Press Maven some disinfection for all the reporting that followed the failure of Long Term Capital, which predicted the end of financial markets as we knew them.

And I Feel Fine ...

Anyhow, New Century is a touch more representative of what is going on in a larger sense than Long Term Capital, a single, if high-profile, hedge fund. New Century is involved with subprime loans, and, as you know, The Business Press Maven has been very negative on housing for quite some time. Part of that negativity has to do with the fact that the only qualification for an aggressive loan in recent years has been a pulse, and though I can't confirm it, it seems there were even waivers given for those without.

But let's face it: The current housing decline has been the most anticipated bear market in history. For one event to redefine all others -- perhaps the collapse of conglomerates in the 1960s, which helped lead to years of lame equity returns -- it has to take the stock market by some degree of surprise.

Moreover, while higher-quality lenders will have to contend with their own loan mistakes, the degree of their error just is not high enough to bring the values of unrelated companies down; it's hardly enough to bring their own stocks down too far. It's sort of like the way a long-overdue, if swift, correction in the Asian markets won't have long-term capital impact on the U.S. markets.

You wouldn't get any of this measured sense from

Business Week

, which went into Defcon 5 mode. Forgive them their sins, I guess. Excitement makes good copy, and besides, historical perspective is Greek to most of the business media, many of whom are 14 years old, have never made money by bucking conventional thought and are too caught up in that day's news to realize that, long term, it isn't worth the paper it usually isn't printed on anymore.

"The canaries in the coal mine are keeling over fast,"

Business Week

screamed in its lead, placing images of suffocation (not to mention claustrophobia) in the minds of those pondering the future of a single piteous home lender.

Dudes, dial it down.

No such luck.

Here's what comes after the opening sentence: "After years of easy profits, the $1.3 trillion subprime mortgage industry has taken a violent turn." Highly anticipated, I'd say, but I'll go along with violent. The joke is, as always, in trying to turn a violent turn -- in China or in subprimes -- into something much, much bigger.

The story continues: "Now there's evidence that the pain is spreading to a broad swath of hedge funds, commercial banks and investment houses that buy, sell, repackage and invest in risky subprime loans."

We're all doomed.

More Scathing

Actually, hedge funds, says the article, "seem particularly vulnerable" -- even though hedge funds are an umbrella structure under which all different types of investments are made. Saying that hedge funds are particularly vulnerable to any one thing (besides whether their fees are too high, their one and only common denominator) is barely coherent. Paging that old Long Term Capital coverage.

Sure enough, we soon have a lurch in the article: "Not that big commercial and investment banks will go unscathed."

Well, sure, they'll be scathed. That's what big housing bears like The Business Press Maven have been saying all along: A lot of those involved in housing will be scathed. But that's a long way from suffocation and death spreading like wildfire on the prairie. And it's far from the particular vulnerability of hedge funds, many of which -- it bears mentioning -- are short housing stocks.

The kicker quotes an economics professor from New York University, saying, "The risk that prime borrowers will start to feel financial stress in 2007 cannot be underestimated."I agree. There is risk that higher-end borrowers will see stress. We cannot underestimate that chance.

But didn't this same article, way up top, tell us breathlessly that there was "evidence" that pain was spreading? Isn't that a long way from a risk of stress not being underestimated?

Oh well. Rest easy, dear reader, on both Asia (the Russian loan crisis revisited) and New Century (a slightly more serious reprisal of Long Term Capital). I'm going for a therapeutic walk. Here's hoping I'm not engulfed in a prairie fire.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children. Fuchs appreciates your feedback;

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