More than $2 billion of Mercury Financial Co.'s market value was wiped out in an eye-blink Friday when trading of its shares finally resumed after a three-day avalanche of bad news.
The stock opened at $2, down from the last trade Tuesday of $14.875. It closed at $2.125.
Investors were bailing out on news that accounting fraud caused the Lake Forest, Ill., subprime auto lender to overstate earnings for the past four years and a report that the former controller, James A. Doyle, was now "cooperating with Federal authorities."
Also on Friday, Mercury defaulted on a $17 million payment to creditors, prompting every rating agency to downgrade the company. And more shareholder lawsuits were filed, seeking reparations for holders of a stock most Wall Street analysts recommended before the blow-up.
Mercury's fall is seen by some as a possible turning point in what had been one of the hottest sectors of finance-lending to people with poor credit records.
With the seven-year-old company desperate for capital and a credit rating in tatters, analysts were preparing eulogies."I don't think they will be able to survive as an independent company," said Prudential Securities analyst Michael Durante.
Mercury was reportedly negotiating Friday with financial institutions for loans so it could pay its creditors and recapitalize. Mercury officials were not available, but issued a statement saying they could not predict the outcome of negotiations.
Mercury's top creditors are reportedly Banc One Corp., NationsBank Corp., First Chicago NBD Corp., and J.P. Morgan & Co. Morgan is listed as the firm's top shareholder in data provided by CDA/Spectrum, with a 4.9% stake in Mercury.
"In the short term, it's not looking very good" that Mercury will be able to repay creditors, said Steven Katz, analyst at Fitch Investors Service. Fitch downgraded Mercury's rating for commercial paper, its primary source of capital, to default.
The company had planned to raise funds by securitizing loans, but with the company out of favor with investors, there are questions who would buy Mercury securities.
Traders in asset-backed securities said investors were worried the credit guarantees that securitizations carry wouldn't be honored in cases of fraud. In the short-term, "the liquidity in this market is probably gone," said Dan Castro, head of asset-backed research at Merrill Lynch & Co.
On Friday, two more class suits were filed on behalf of shareholders, bringing the number of suits pending to four. One of the suits name Mercury's auditor, KPMG Peat Marwick, as a co-defendant; chief executive John Brincat and Mr. Doyle are named in all four.
Despite the mess, National Auto Finance Co., a Boca Raton, Fla., "nonprime" lender, sold 2 million shares at $8.50 apiece in an initial offering led by Raymond James & Associates Inc. and Cruttenden Roth Inc.
"Unfortunately the timing was bad," National president Roy Tipton acknowledged, "but the execution was pretty good."