Downey isn't IndyMac, analyst asserts

Wall Street has plenty of doubts about the survival of Downey Financial Corp., as the Newport Beach-based lender’s $2 share price indicates.

Now, one analyst is sticking his neck out, asserting that Downey won’t follow IndyMac Bank into the ranks of failed lenders.

Christopher Whalen, a partner at Hawthorne-based market research firm Institutional Risk Analytics, says that despite Downey’s high mortgage loan default rate, he believes that "hysteria and media hype" may be obscuring the value in what he considers a strong retail banking franchise.

He thinks the firm’s $60-million stock market value is "silly" -- as in, way too low -- even assuming what he says are worst-case numbers for future loan losses.

Whalen is a smart guy who more than a year ago was warning of massive losses in the banking system because of the subprime debacle. So he has street credibility. His commentary on Downey has been posted on the SeekingAlpha investing website.

Part of Whalen’s defense of Downey rests on the fact that the $13-billion-asset thrift has a strong core base of deposits, and therefore doesn’t depend on the kind of hot money (i.e., "brokered" deposits) that funded IndyMac Bank.

But as one commenter on the SeekingAlpha site notes, Downey’s solvency depends on whether it has enough balance-sheet capital to handle another wave of loan markdowns. The deposits may stay put, but a bank with no capital cushion is a busted bank.

Whalen seems to be betting that a deep-pocketed acquirer will see the potential long-term value of Downey’s deposit and lending franchises before the thrift has to take more write-offs that could be fatal.

Wall Street already knows that some private-equity investors have been kicking the tires at Downey. But the market isn’t willing to bet that common shareholders would get much of a premium even if a deal were to happen.

After all, with Downey's bad loans now accounting for 11.4% of total assets (and that's not counting what the thrift calls its "performing" troubled debt), the company isn’t negotiating from a position of strength.

Comments

[Wil]

This analyst has it wrong this time. Downey is a failure. If it survives the end of the year, it will be too long. One (of many) problems is the makeup of the Downey account holder. Most are over 70, are going to retire soon (or die), and Downey just doesn't have the products or management structure to compete with other, stronger financial institutions.

[Qzaki Fan]

Unfortunately, the prediction markets tell another story. Downey 2008 failure contracts on the Intrade prediction market last traded at 55 and the ask is 75.

Let's wait until the end of the year to decide who is "smart" and who is "silly".

[Harelsh]

I think DSL within one month will reach 5$ in the worst case ,
I'm sure that after ABK already start it's rally after falling to 1.06 $
DSL now is in the same situation .

[Steve]

Why take the risk, another CA bank that will hit the wall. I would not put a dine in any national and CA based institution. Move your money to the a midwestern regional based bank where they do not have the exposure of CA RE. They are more conservative, better managed and treat you better.