The reaction to the meltdown of the subprime mortgage market has been swift on Wall Street and on Capitol Hill, with bankers publicly distancing themselves from riskier loans while lawmakers are considering placing controls on the market.
But prominent investment houses are signaling they might not be leaving the subprime business, with some taking steps to help the industry weather the current storm.
Earlier in the week, banks were reassuring analysts that their investments in the market were limited. This followed the near collapse of themarket due to a number of factors, including increases in foreclosures and late payments and some lenders’ decision to stop offering subprime loans.
Worries about subprime loans contributed to steep losses on Wall Street, with the Dow Jones falling sharply in the last two week on continued bad news from the mortgage sector.
“Our strong diversification story in fixed income more than offset the impact of weaker contributions from the U.S. residential,” Chris O’Merea, chief financial officer for Lehman Brothers, said in a March conference call.
Lehman is one of the largest buyers of mortgages, which it converts to securities for sale.
The issue made its way to Capitol Hill last week. Democrats in the House and Senate said on Tuesday that they were considering legislation restricting speculative lending practices. Rep. Barney Frank, D-Mass., has scheduled a subcommittee hearing on the matter next week.
Despite this environment, the market is not being completely abandoned by Wall Street. Goldman Sachs, Lehman Brother and Bear Stearns this week said they had not ruled out committing more money to the subprime market. Also, shares of subprime lender Accredited Home Mortgages rebounded late this week to more than $10 from around $4 Wednesday.
Even New Century Financial – the lender who had trading of its stock suspended by the New York Stock Exchange Wednesday – saw its stock go up 73 percent on the Pink Sheets Friday, closing at $2.34.
