Saw an interesting story tonight over at the Wall Street Journal about Bear Stearns' analyst Gyan Sinha, one of Wall Street's most respected sources over the years -- he's the latest to be raked over the coals during the mortgage credit crisis. Sinha hosted a conference call in February just before the fit hit the shan, during which he was -- oops! -- unabashedly bullish on subprime mortgage bonds:
"It's time to buy the [ABX] index," he told clients on the Feb. 12 call, according to a participant. Based on Bear's models, "the market has overreacted," the participant says Mr. Sinha added... Even then, some found the assessment over the top. "When you read the research [Bear] put out, you can think of one of two things," says independent housing economist Thomas Lawler, who poked fun at Mr. Sinha's bullish view in his own market commentary on Feb. 13. "One is, they weren't getting it as fast as others, or two, they were really trying to talk the market back up. I don't know which."
The WSJ makes a pretty noble effort trying to stay neutral on what's ahead for Sinha, saying that "even some of the subprime bears acknowledge that unusual market conditions, including the unprecedented combination of falling housing prices and stable unemployment figures, have made the mortgage-securities market difficult to assess." Difficult to assess? I'm not sure who or where these subprime bears are, but I'd guess very few of them would say that the mortgage securities market has been "difficult to assess" this year. The mortgage-securities market is a complex one, yes, but it's really not all that difficult to understand. You need two things to play money ball in this space, however disintermediated you are: new volume pumped in, and underlying collateral performance that at least resembles whatever initial expectations you had when you first stepped up to bat. If you can get those two things, or even close to them, you can literally mint money. Which, of course, is exactly what took place during the housing boom. Liquidity led to more liquidity, which led to all sorts of new liquidity and far-flung securitization structures that could build -- you guessed it -- even more liquidity. But all it takes is for new volume to suddenly dry up, or underlying collateral suddenly failing to meet performance expectations -- worse yet, both -- and the party's over. Liquidity dries up, taking new volume with it. Collateral performance is at put at risk from a resulting lack of credit availability. Add in a well-timed contraction on the consumer side of the housing market, and you've got a market that is headed down in a hurry. As for the underlying collateral aspect of market assessment, Sinha told the WSJ in the article above that he still believes housing prices will remain flat this year, calling such an assumption "reasonable and consistent" with government data. I'm not exactly sure what government data is being referred to, but when you consider that even the NAR has been forced to predict a housing price decline for 2007, I'd have to say that Sinha's opinion is best characterized as anything but "reasonable and consistent."