Cockroach Theory

Loading the player...

DEFINITION of 'Cockroach Theory'

A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative events that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that there are many more that remain hidden.

BREAKING DOWN 'Cockroach Theory'

For example, in February 2007, subprime lender New Century Financial Corporation faced liquidity concerns as losses arising from bad loans to defaulting subprime borrowers started to emerge. This company was the first of many other subprime lenders that faced financial problems, contributing to the subprime mortgage meltdown.

In other words, the fact that one subprime lender (one cockroach) faced financial problems indicated that many other similar businesses were likely to face the same issues.

RELATED TERMS
  1. Subprime Market

    The market for lenders and borrowers of subprime credit, a credit ...
  2. Subprime Rates

    Interest rates charged to subprime borrowers, such as on loans ...
  3. Subprime Credit

    General term for borrowings of subprime debt, or loans made to ...
  4. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  5. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  6. Subprime Borrower

    A person who is considered a higher-than-normal credit risk. ...
Related Articles
  1. Term

    What's Cockroach Theory?

    A cockroach theory suggests that one piece of bad news indicates more bad news will follow.
  2. Economics

    What is a Subprime Mortgage?

    Subprime mortgages are offered to borrowers with low credit ratings, usually 600 or below.
  3. Economics

    The 2007-08 Financial Crisis In Review

    Subprime lenders began filing for bankruptcy in 2007 -- more than 25 during February and March, alone.
  4. Options & Futures

    Subprime Is Often Subpar

    Proceed with caution when considering these short-term, high-interest mortgages.
  5. Credit & Loans

    Don't Get Overcharged for Your Mortgage

    Don't pay more for a mortgage than necessary. Here’s a quick look at the different categories and how to be sure you're getting the best deal.
  6. Credit & Loans

    Credit Crisis: What Caused The Crisis?

    By Brian PerryIn this chapter, we'll examine the causes of the credit crisis, starting with the decline in the housing market that eventually led to increased levels of mortgage defaults. These ...
  7. Budgeting

    The 10 Strangest Phrases In Banking Explained

    Just about every industry has its own special language, the world of banking and finance is full of jargon to communicate with their own kind.
  8. Home & Auto

    When Getting a Rent-to-Own Car Makes Sense

    If your credit is bad, rent-to-own may be a better way to purchase a car than taking out a subprime loan – or it may not be. Get out your calculator.
  9. Home & Auto

    5 Risky Mortgages To Avoid

    There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing.
  10. Credit & Loans

    What Does a Lender Do?

    A lender provides funds to another with the expectation those funds will be repaid with interest.
RELATED FAQS
  1. What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result ... Read Answer >>
  2. How much risk is associated with subprime mortgages?

    Discover the risks associated with subprime mortgages. Find out whether taking out a subprime mortgage on your home is really ... Read Answer >>
  3. Are subprime mortgages still available for homeowners?

    Buying homes became increasingly difficult after the housing bubble burst. Since then, subprime mortgages have been making ... Read Answer >>
  4. What role did securitization play in the U.S. subprime mortgage crisis?

    Learn how the securitization of sub-prime mortgages into asset-backed securities fueled the real estate market crash in 2 ... Read Answer >>
  5. What is a liquidity squeeze?

    A liquidity squeeze occurs when a financial event sparks concerns among financial institutions (such as banks) regarding ... Read Answer >>
  6. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center