The Subprime Lending Debacle

I have been monitoring the fallout in the subprime lending industry over the last few months closely. The most interesting story I have found relates to a hedge fund run by Thomas K. Brown called the Second Curve fund. For those of you who don't know Brown he is one of the "Tiger Cubs" that worked at Julian Robertson's Tiger Management hedge fund firm in the late 1990's. Tiger management had a great run throughout the 80's and 90's but closed its doors in 2000 after the firms total AUM went from $21 billion to $7 billion in just a few years. In spite of the losses Tiger Management spawned 4 or 5 successful hedge fund managers (hence "Tiger Cubs"), among whom Thomas Brown is one. He is considered by many to be a top expert on bank stocks. He also writes an interesting blog which you can read here.

I saw a headline late last week drawing attention to how poorly Brown's fund was performing this year. I did a little bit of research and noticed that in Brown's blog post on February 27th he speaks glowingly about the merits of several of the subprime lenders that have been absolutely punished by the market this week. Accredited Home Lenders Holding Co. is off 20% since the glowing review in Brown's blog and New Century Financial is down 67% since the post. Check out both stocks 1-year graphs below:

Accreddited Home Lenders Holding Co. (LEND)

(click for a larger view)

New Century Financial Corporation (REIT:NEW)

(click for a larger view)

Needless to say I think Brown must be having a devastating year. He was off 8.4% in January alone before this further punishment. I sure hope that Brown hedged some of his bets otherwise he may well have lost $100mm+ over the past 2 months. It will be interesting to see if Brown writes another blog post soon with comments on the correction. I've added his blog to my blogroll so you can access it directly from here. I'll let everyone know if he posts again soon.