bond investor

Prime Bomb: Former Golden Child Hudson City Bancorp Sees Prime Delinquencies Skyrocket

You should be long HCBK, not short. Its franchise is significantly undervalued. I think you make three four errors; it may be that you've thought of these things but just didn't include them in the article.

1. A loan portfolio has a "cure rate," in which *what's left* in the loan portfolio *after* certain loans are provisioned for and charged off is *healthier* than before. Hence projecting chargeoffs and provisioning to head upward indefinitely is not appropriate. In fact, many analysts looking at 3Q bank earnings thus far have concluded that the declines in loss reserves is a *positive*, not a negative, as it shows "what's left" in banks' loan portfolios has not needed as much provisioning as in prior quarters.

2. Your charts on delinquencies need more data series to do apples-to-apples comparisons. You compare HCBK's prime jumbo book to the FNM book of non-jumbo loans. I would be encouraged, not discouraged, that a portfolio of loans with a high original loan size was performing so well versus a portfolio of loans with average-to-low original loan size. While LTV is most important, we should be clear on the second-order effects, too, and you're not.

3. HCBK can easily earn its way through its loan losses. Its efficiency ratio is in the mid-20s, meaning that for every $1.00 in deposits, only about 25c goes to expenses. Contrast this to the bank sector average efficiency ratio in the low 60s. HCBK can keep offering better deposit rates and growing spread income. But you only focus on the loan book. More comprehensive analysis looks at the *future*, not just the present and past.

4. All stocks should be valued on both a relative and absolute basis. I agree that on an absolute basis, HCBK is facing some headwinds, but as 1-3 above explain, I think you are overplaying them. On a *relative* basis, HCBK is cheaper on a Price/Book basis to banks like WFC, with it Wachovia/Golden West option-ARM timebomb ticking inside its balance sheet. But perhaps you are also short WFC. If so, then we agree on something!

Disclosure: long HCBK, can't short specific stock like WFC 'cause all my money's in my IRA.