At the current price, the market is suggesting one of three things will happen.

1. All of Manhattan Bridge's loans will default and the collateral that they collect will only be worth 57 cents on the dollar.

I consider this scenario extremely unlikely. LOAN has never had a default, NEVER. They have a very diversified loan portfolio and they are very conservative in their lending, and they always resist the institutional imperative. All of their loans defaulting is almost impossible, but if they do, the company will likely get more than 57 cents on the dollar, as all loans are fully collateralized by New York City real estate, marketable securities, or accounts receivables.

2. 43% of the loans will default, and the collateral will be worthless.

Again, not very likely for the reasons I just mentioned.

3. Negative earnings will eventually erode the current asset value down to match the current price.

Of all the scenarios the market is suggesting, this is most possible, but still highly unlikely. LOAN's earnings have been spotty. They do much better in a tight credit market, because companies cannot get the loans from banks they need because nobody is lending, except Manhattan Bridge of course. This leads many high quality customers to Manhattan Bridge. During easy credit, the opposite is true, as everybody and their bankrupt mother can get a loan from just about everywhere. Assaf Ran, the company's CEO, would make an excellent value investor. He does the opposite of what the lending "herd" does. During easy lending times, he doesn't lend to poor quality borrowers as everyone else is doing. During tight lending times, he doesn't refuse to lend to high quality borrowers just because the current economy scares him.

So if the company is so good at lending, why are the earnings so spotty? This is because their SG&A stays the same no matter what the revenue is. Revenue will fluctuate with how many loans the company is able to make, but SG&A stays the same. I think the risk of loss is still minimal here for two reasons. Losses have never been very copious in one single year, and management owns a large amount of shares (almost half of the shares outstanding). They have too much of their wealth tied up in LOAN and they wouldn't let losses ruin the company. They would eventually cut expenses (lay people off and maybe take a pay cut themselves) to match lower revenue, which would likely produce profits again. Also, the boom part of the business cycle is not long enough for negative earnings to sink this company. The previous economic boom was a period of some of the easiest credit in the history of man. This easy credit bubble produced several years of negative free cash flow for LOAN, and yet it never came close to sinking LOAN.