American Home Mortgage was the tenth largest mortgage company in the US. Note the past tense in that sentence. The companysimply evaported the last few days going from about $20 to 62 cents, read bankruptcy in a month’s time.
What is going on here? Accountants value assets and report them on the balance sheet. The so called assets for AHM, mortgages or loans held against properties, were clearly not worth what was reported on the balance sheet. Indeed as best I can tell AHM was ‘worth’ $21 a share in net book value as recently as March 2007. Yet today it is worth nothing. This reflects the difficulty of valuing intangible assets like mortgages. The mortgage is only worth what the debtor can pay or what can be realized from liquidating, read selling, the property. With so many properties coming on the market in foreclosure, it is hard to imagine that values will do anything other than plummet.
This is an example of what I call the Black Hole of Wall Street. The millions of dollars that shares in AHM did represent are now gone, as surely as if a spaceship had landed and spirited the firm away to the Planet Xernon. This is why a bear market, in which shares decline or lose 100% of value is so hard on an economy. Wealth is destroyed in a bear market. Click on the graph above to see the reality of such destruction.
Professor Elam 
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