Downey warns on capital, possible seizure by feds

10:14 PM, November 10, 2008

No real surprise here, but loss-ridden mortgage lender Downey Financial Corp. formally warned investors that it might be seized by regulators before the end of the year if it can’t raise additional capital.

In the company’s 10-Q report filed with the Securities and Exchange Commission on Monday, Newport Beach-based Downey noted that it was under regulatory orders to maintain specific capital levels.

From the filing:

The bank consent order requires the bank to maintain a minimum Tier I Core Capital ratio of 7% and a minimum Total Risk-Based Capital ratio of 14% at each quarter-end. While the bank was in compliance with this requirement at September 30, 2008, based on the bank’s current and projected levels of capital, the bank anticipates that it will not be able to satisfy the Tier I Core Capital and Total Risk-Based Capital minimum ratios of its consent order as of December 31, 2008, unless it raises additional capital on or prior to that date.

In the current economic environment, there is a significant risk that the bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the bank consent order by year-end.

If the bank does not comply with the consent order, without a waiver by the [Office of Thrift Supervision] or amendment of the consent order, the bank could be subject to further regulatory enforcement action, including, without limitation, the issuance of additional cease and desist orders (which may, among other things, further restrict the bank’s business activities, the imposition of civil money penalties against the bank, and placing the bank into a conservatorship or receivership).

Downey also warned that regulators "could take enforcement action before" the end of the year, "which could include placing the bank into receivership. If the bank is placed into a conservatorship or receivership, it is highly likely that this will lead to a complete loss of all value of the holding company’s ownership interest in the bank" -- meaning a wipeout of shareholders.

The stock closed at $1.45 on Monday, down 4 cents, before the filing. Not much mystery about how the market is betting on Downey.