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THE SKEPTIC: 'THERE WERE SCREAMING MATCHES''There were screaming matches between the bankers and me,'' remembers Thomas Facciola. ''Companies would call and threaten to pull investment-banking business, and I was told some did.'' Facciola, a securities analyst at Salomon Brothers Inc. in 1996, was writing negative reports about some of Wall Street's newest and hottest darlings: companies that originated vast numbers of auto and home-equity loans, mostly to risky, ''subprime'' consumers. ''The stocks were given earnings multiples in the 25 or 26 range for companies which had no earnings,'' says Facciola in a staccato, fast-paced voice heavy with the accent of Staten Island, where he was born. ''Investors were gobbling up the paper like Pac Man. At the time, they were in denial of what was going on.'' But in his 1996 report entitled All Pain, No Gain, Facciola was the first to warn investors that companies were using imprudently aggressive accounting assumptions when booking future earnings. He warned that the companies' growth had become a kind of Ponzi scheme. If funding slowed--or if the loans had problems--the companies' ''illusional earnings would disappear,'' says Facciola. Today, Facciola, who left Salomon for a more lucrative offer at Lehman Brothers Inc. in 1997, still covers the specialty finance sector, which is now in a shambles, as he predicted. The vast majority of subprime auto stocks have declined more than 80% since the beginning of 1997. Subprime home-equity stocks followed suit, dropping close to 75% in the same period. ''It took less than two years for this sector to go from its peak to absolute implosion,'' Facciola says. Naturally, Facciola's early warning pleases his clients: ''Tom has been consistently accurate,'' says Alex Greenberg, a partner at hedge fund Ardsley Partners in Greenwich, Conn. ''Early on, he anticipated that fundamentals in subprime lending were deteriorating even though the stock prices remained high. He refused to take management predictions at face value.'' For analysts like Facciola, who speak their mind, screaming matches are just part of the job.
By Debra Sparks in New York RELATED ITEMS
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Updated Oct. 15, 1998 by bwwebmaster
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