How Missed Signs Contributed to a Mortgage Meltdown By NELSON D. SCHWARTZ and VIKAS BAJAJ The New York Times August 19, 2007
All through last year, Jim Melcher saw the signs of a rapidly deteriorating American housing market - riskier mortgages, rising delinquencies and more homes falling into foreclosure. And with $100 million in assets at his hedge fund, Balestra Capital, he was in a position to do something about it. So in October, as mortgage-backed bonds were still flying high, he bet $10 million that these bonds would plunge in value, using complex derivatives available to any institutional investor. As his gamble began to pay off in the first months of 2007, Mr. Melcher, a money manager based in New York, plowed the profits into ever bigger wagers that the mortgage crisis would worsen further, eventually risking some $60 million of the fund's money. "We saw the opportunity of a lifetime, and since then events have unfolded on schedule," he said. Mr. Melcher's flagship fund has since doubled in value, even as this summer's market turmoil cost other investors billions, forced the closing of several major hedge funds and pushed the stock market down 7 percent since mid-July. This week, Mr. Melcher is heading to Paris for a vacation with his wife. The extent of the turmoil has stunned much of Wall Street, but as Mr. Melcher's case makes clear, there were ample warning signs that a financial time bomb in the form of subprime mortgages was ticking quietly for months, if not years. As far back as 2001, advocates for low-income homeowners had argued that mortgage providers were making loans to borrowers without regard to their ability to repay. Many could not even scrape together the money for a down payment and were being approved with little or no documentation of their income or assets. In December, the first subprime lenders started failing as more borrowers began falling behind on payments, often shortly after they received the loans. And in February, HSBC, the large British bank, set aside $1.76 billion because of problems in its American subprime lending business. Over the last two weeks, this slowly building wave became a tsunami in the global financial markets. ... http://www.nytimes.com/2007/08/19/business/19credit.html?ex=1345176000&en=095a33cb724b607e&ei=5090
