Downey isn’t IndyMac, analyst asserts

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

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.