Why Worry When You Can Buy?

By the end of last week, financial markets were at one of those fascinating resting points.

For much of the week, Wall Street had been roiled by concerns over the subprime mortgage, particularly after the Mortgage Bankers Association reported a big jump in delinquencies and foreclosures. In the United States, stock prices plunged, led by shares of banks, investment banks, mortgage companies and home builders. Banks began to withdraw credit lines to subprime lenders, while securities tied to subprime mortgages were dumped on the markets. Market analysts began to warn of a spillover to other credit markets, not just for mortgages but for junk bonds and other high-risk securities. Economists trimmed their forecasts for economic growth, while some in Washington began to talk about the need for some sort of relief for homeowners facing foreclosure.

But as often happens, while some see danger, others see opportunity. And by week's end, some of the biggest names on Wall Street were buyers again, declaring that the sell-off had been overdone. Shares of Fremont General, Accredited Home Lenders and even New Century Financial all soared after Fremont announced that Credit Suisse had increased its lines of credit and the Blackstone Group announced it would purchase a mortgage unit from General Electric. Bear Stearns, one of the biggest underwriters of mortgage-based debt, announced it was shopping for subprime mortgages that had soured.

Against the backdrop of market turmoil, Bear Stearns, Lehman Brothers and Goldman Sachs last week released quarterly earnings reports that showed continued strong growth in profit and precious little impact from any problems in the mortgage market.

"The dislocation is an opportunity for us," Bear Stearns's chief financial officer said. A Lehman executive noted that subprime loans had accounted for less than 3 percent of revenue. Goldman's chief financial officer reported that the firm's subprime mortgage exposure was modest and that the credit derivatives markets, on which the firm hedges its mortgage bets, was holding up just fine.

But other observers were not so sanguine, noting the firms' refusals to quantify how much of their revenue growth has come from mortgage financing or what impact a further deterioration might have. Moody's economist John Lonski spoke for a number of analysts in warning that the problems in the subprime market could lead to a more generalized tightening of credit. And economist Henry Kaufman warned not to put too much faith in the financial models Wall Street uses that are so new they have yet to be tested by a serious market downturn.