New Orleans Followers of the sub-prime wars still remember the place that New Century holds in the pantheon of the companies that seemed to dominate the market as Ameriquest did at one point and Countrywide did later. They were somebody then were as recently as 2006 until a year ago when they suddenly collapsed in bankruptcy and their whole house tumbled down.
At the end of a 5-month Justice Department investigation into their financial practices culminating in a 580-page report, the early conclusion seems to be that our buddies at New Century had a lot of help and in this case it seems to have been from KPMG, their auditors. Much like the Enron situation, it appears at first glance as if KPMG “enabled” management to present losses as if they were profits. The trick seems to have been to not correctly classify loans that they were buying back from pools and Wall Street that were faulty or would not move. Rather than call these buybacks losses, as they surely must have been, they were classified as if they were “investments” or some other category and it the balance sheet positively. I may not even have that right, but the bottom line is that the impact was such that rather than reporting significant losses at the end of 2006, they reported profits.
Management made the most of this by paying themselves significant multi-million dollar bonuses and cashing out shares while the price was still high. Furthermore many of the original founders must have smelled the scent of death and bailed. It was funny when our delegation met with them first in Irvine, California that the CEO was hardly 2 days on the job and made a joke about everyone else leaving but his still “drinking the Kool-Aid” on the job and even with the kind of loan he had on his own home.
One of the fallouts in all of this mess simply has to be an assurance that there will be more disclosures of financial information and some steps towards real transparency. Clearly, the auditors are worrying about their hides, and not the clear window for the public to see into the company’s condition.
We have to fix this.
