New Century Finally Goes Broke

Yesterday, we noted that thousands of people are leaving Michigan. Jobs are disappearing. House prices are falling. The place is having a 'one state recession' according to the news reports.

But when they've loaded the Chevrolets, where do they go?

Ask the movers. According to Atlas Van Lines, Texas is the top destination for Americans who've pulled up stakes. And they come from all over - not just the Rust Belt. In fact, many are leaving the hurricane coast of Louisiana and Mississippi to take up residence in Texas. And if this continues, Texas could be home to about 25 million people by the year 2010; and by 2040 the state's population could hit 51 million.

We once lived in Mineral Wells, Texas, as a small child. That was in the days before universal air-conditioning. All we remember was that it was hot, which is such a strange thing for a child to remember that we suspect we are just making it up.

The big financial news yesterday was that New Century Financial finally went broke, owing USD$100 million, according to the bankruptcy filing in Delaware. One hundred million is chump change, of course. But we continue listening for other shoes to drop. When standards fall, shoes hit the floor.

New Century's stock traded at more than USD$30 a year ago, and as much as USD$66 two years ago. Yesterday, you could buy a share for USD$1...which makes us wonder: What's wrong with Mr. Market? Is he blind? Deaf? Or just dumb?

In Malcolm Gladwell's defence of Enron's managers in the New Yorker in January, he points out that all the data needed to figure out that Enron was a house of cards was readable in the company's various filings. If investors didn't bother to read them, he says, well, it's no reason to send the Ace of Spades, CEO Kenneth Skilling, to jail for 24 years.

And it shouldn't have taken Sam Spade to figure out that the House of New Century was not exactly as stable as the Pyramid of Cheops. We said as much right here in the pages of The Daily Reckoning: As a business model, lending money to people who can't pay it back has a serious flaw.

And so now...the poor people who took out loans to buy houses in Michigan...and then lost their jobs to Koreans or Pakistanis...have to move on.

But what can they do with their houses? "U.S. workers saddled by (they must mean 'with') houses that won't sell," says the Christian Science Monitor.

What can they do? It's simple - pull down the shades, pack their bags, pour motor oil on the carpet to teach the mortgage company a lesson, and head for Texas.

"Loan delinquencies soar," reports Bloomberg.

And so the poor people who bought New Century at USD$66...or lent it money when it was in the chips...are counting their losses.

But among those NOT yet headed for Texas, are New Century's three founders. Who says you can't still get rich in America? These guys took out $40.5 million in profits - selling their shares to the lumpen between 2004 and 2006. But now (oh ye wicked Fates!) the feds are on the case and the whole affair threatens to go a little sour, like Enron before it.

Bill Bonner
The Daily Reckoning Australia

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