I read today with much interest about the fall of New Century Financial, and what some feel was the harbinger of the sub prime mortgage crisis.  New Century Financial was setting itself up for a fall long before this mess became so prominent.

The chief financial officer, Tajvinder S. Bindra, had on several occasions requested financial information from the accounting firm KPMG and the company’s controller for enough information to close the books at the end of 2006.  He was met with a lot of resistance.  Then, a few weeks later, on Jan. 31, 2007, KPMG and the company’s own accountants floored the company board by telling them that they did not have enough money to cover the required reserves for backing bad mortgages. The mistake cost New Century $300 million dollars.

This was bad enough in itself, but the company had released a press release In September of 2006, painting a very rosy picture of the financial shape that the company was in.

A lot of people are wondering how a front-line manager, such as KPMG, could be so remiss in reporting how effective their clients were being.  Sorting through this mess would probably take years of work, and knowing why KPMG did not give New Century a good picture of where it was really at remains a mystery.  The examiner handling the New Century case says that the people at New Century had little idea of the mess they were getting themselves into, and went so far as to say that they only used simple spreadsheets to track this data.

Many blame KPMG, who resigned from New Century after they declared bankruptcy, leaving the 2006 books unfinished.  KPMG of course blames New Century.

Was it KPMG or New Century itself that caused the downfall of the company?  I think that it may take a long time to untangle the whole scenario.  To me, this is just one more reason for governmental regulation of banks and lending institutions, no matter how many bankers squeal in protest.  Maybe then we could blame the government?