The summer’s bursting of the asset-backed securities bubble and the contagion that spread from subprime mortgages through the capital markets came as no surprise to distressed-debt specialist Wilbur Ross, who had been predicting that default rates on high-yield bonds, at historical lows last year, would rise sharply. But the chairman and CEO of New Yorkbased WL Ross & Co. still has faith in the mortgage business. In August he lent $50 million to subprime lender American Home Mortgage Corp. after it sought bankruptcy protection, and in September he bid $435 million to buy the American Home unit that collects payments from homeowners. Now he’s scouting lenders of so-called jumbo mortgages (generally more than $417,000), which he considers a good risk. Institutional Investor Senior Writer Michael Shari interviewed the 69-year-old investor last month.
How did you anticipate the market turmoil?
Ross: I have trouble understanding how if you take a $100 pile of fairly low-quality paper, simply by slicing and dicing it you can make it into something that trades for $103. The net effect of securitization literally was to create aggregate securities that have significantly more trading value than the underlying assets. The explanation for that has to be that the various rating layers could not have been correctly analyzed. People were relying totally on credit ratings and not doing any underlying analysis.
Are the ratings agencies to blame?
I don’t think it’s just that the ratings agencies did a poor job. It points to a big problem with modeling. Wall Street has gone a little bit berserk with its reliance on modeling. When the subprime thing blew up, and the quantitative hedge funds got smacked by volatility, they wrote fairly pathetic letters to investors that basically said things like, “Well, this was so many standard deviations from normal that we couldn’t cope with it.” Well, what good is a model if it can’t cope with what actually happens?
What lessons can we learn from this summer?
One is that models don’t replace human minds in reacting to things, because human minds can adjust. Second, the two most dreaded words in one’s vocabulary should be financial engineering. Third, you can’t just rely on ratings. Fourth, whenever Wall Street says, “This time it’s different,” that’s a very real sign of danger, because it never really is different.
What opportunities do you see in this crisis?
We intend to go all the way into the mortgage business. Our ultimate goal is to be originating, selling, packaging and servicing, probably initially in so-called jumbo mortgages. There is nothing wrong with making mortgages. There’s not even anything wrong with making mortgages to weaker credit. But you have to do it in a rational way. You have to expect a higher loss ratio, and, therefore, you have to charge more, not less, interest.
Any other opportunities?
We are very interested in Germany. We already own European auto-parts businesses based there. A couple of German banks that lend to medium-size companies have failed. So there’s a lot of activity, a lot of consolidation, a lot of sorting out of loans and such going on. There will be lots of opportunities. We are very excited about India. We opened an office in Mumbai, a joint venture with the Housing Development Finance Corp., and we have a fund dedicated just to distressed companies there. We are the first foreigners permitted to take over a company, restructure it and get it out from under the bankruptcy process. We are very interested in doing more things in Vietnam, where we have a joint venture in the textile area. And we have been active in China, mostly putting in factories there.
