Mortgage Lender in Need of Loan Wall Street Clamps Down on Credit Lines for New Century

By Julie Creswell and Vikas Bajaj

During a credit crisis nearly a decade ago, New Century Financial found a white knight in U.S. Bancorp, which was willing to save the company with a fresh infusion of capital.

This time, no savior has appeared on the horizon for New Century, one of the biggest mortgage lenders to borrowers with weak, or subprime, credit.

Instead, the Wall Street banks and brokerage firms that just a few months ago welcomed New Century with open arms and gave it credit lines worth billions of dollars have quickly shut off the spigot, pushing it closer to bankruptcy.

New Century said in a securities filing Monday that all its lenders had frozen their credit lines and were demanding that it buy back $8.4 billion in loans that it issued using the money it had borrowed from the banks – money New Century says it does not have.

[On Tuesday, it said in another regulatory filing that it was being investigated by the U.S. Securities and Exchange Commission, the latest sign that regulators and prosecutors are taking an interest in the widening crisis, Reuters reported. New Century also said it had received a grand jury subpoena requesting documents as part of a previously announced criminal investigation by the federal prosecutor in Los Angeles into New Century's accounting losses and trading in its securities. The New York Stock Exchange said it had determined that trading in New Century shares should be suspended immediately.]

In the last few days, several lenders have held discussions with New Century about providing debtor-in-possession financing in connection with a bankruptcy filing, according to a person briefed on the situation.

The company could then pursue a sale of itself or its assets through a bankruptcy filing, the person said.

For Wall Street banks and brokerages firms, the stakes are much higher now than they were a decade ago. In 1998, U.S. Bancorp saved New Century by acquiring 17 percent of the company for a mere $20 million

The closest thing to a white knight recently for New Century, which experienced a 90 percent tumble in its stock price this year before trading was halted Monday, has been Morgan Stanley, which offered a financing package totaling $975 million last week

But even that lifeline has not been enough.

What is perhaps most remarkable about New Century’s troubles is the speed at which its banks acted. Their quick about-face appears to have been a response to the rapid demise of the subprime segment of the mortgage business, where default rates have spiked in the last six months.

“It’s just a question of confidence,” said Zach Gast, an analyst with the Center for Financial Research and Analysis, a forensics accounting firm that has been following New Century’s troubles. “Once the first person went, we thought everybody would go. You don’t want to be the last one holding the loans.”

The banks also appear to have been caught unawares by the scope of New Century’s problems. For instance, a week after the company said it would have to restate its financial statements for the first nine months of last year, Goldman Sachs extended to May 14 a credit line to New Century that was set to expire Feb. 15.

Goldman Sachs agreed to extend its credit line after nearly two weeks of negotiations with New Century.

The extension was for three months, and the investment bank changed aspects of the agreement to give itself greater control over the relationship and allow it to get out of the agreement at the first hint of trouble, according to filings with the Securities and Exchange Commission.

Goldman was not alone in betting, at least initially, that New Century might prevail, even as the company sent signals that something was amiss.

On Feb. 19, Citigroup acquired 5.1 percent of New Century, a stake that was worth about $55.2 million then, on behalf of individual and institutional clients.

Over the next few days, New Century received notice from the market trading analysis division of the New York Stock Exchange that it was examining trading in the company’s stock. The trading also landed the company on the radar of prosecutors with the federal prosecutor’s office in Santa Ana, California, who began an investigation on Feb. 28.

Two days later, after the close of the markets on Friday, March 2, New Century announced the various investigations into trading of its stock and also disclosed that it had most likely breached its lending agreements with Wall Street and was working to receive waivers of those covenants.

Yet the warning flags had already gone up inside two of New Century’s lenders: Goldman and Citigroup.

On March 6, Citigroup demanded that New Century put up more cash through an $80.3 million margin call and demanded that the company buy back $717 million in loans that had been financed through Citigroup’s line of credit.

About the same time and just weeks after renewing a line of credit with New Century, Goldman also made a margin call and sent notice to the company that it was in default of its credit arrangements. The same day, in a conference call with all of its banks, New Century said it had received margin calls from a number of its lenders and that it paid some but would not be able to honor them all, according to a person briefed on the call.

(c) 2007 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.