It Keeps Falling Apart

Floyd Norris

If you can keep your head when all about you are losing theirs, maybe you just don’t understand what is going on.

Wal-Mart’s warning this morning may have provided the clearest indication yet that consumers are cutting back. The idea that the housing market could fall apart without spreading to the rest of the economy looks less and less likely.

That may be more important in the long run, but today it is the further unwinding of leverage that is scaring investors, and for good reason. Something called Sentinel Management, which invests in futures contracts, wants permission from the Commodity Futures Trading Commissionto delay paying back investors. It isn’t clear (to me, at least) what is going on there. But I assume that Sentinel has discovered that the combination of illiquid assets and high leverage can be fatal.

And that may also be the case at a mortgage REIT named Thornburg Mortgage. It was less than a month ago that Thornburg reported solid earnings and declared a good dividend.

Discussing “the current credit crisis,” Thornburg’s president Larry A. Goldstone said in the conference call on July 20, “This is not a big surprise to us.” The problems that hedge funds were having with mortgage securities were something that his company could take advantage of, he said.

No doubt he meant it. He and other insiders bought millions of dollars worth of shares over the next couple of weeks, paying $21 to $26 a share.

Today, Thornburg appears to be collapsing, unable to roll over its own loans. The shares were halted after they crumbled to below $8. After the market closed, the company said it would delay paying the dividend for a month.

Mr. Goldstone said that after everything settles down, the company will be back to making mortgage loans, and will make a lot of money doing it. Thornburgh is a “lean, nimble operating company.”

Perhaps it is. But it is also a highly leveraged one. In this environment, that can be a fatal mistake.