Craigla1

Why Downey Financial is Not IndyMac

One further comment:

"Indeed, even were the bank's capital wiped out by losses of say 2x current default rates, a remote possibility in our view, the loan portfolio would still be worth north of 60-70% of par. Right?"

If the portfolio were worth 70 cents on the dollar, consider this:

70% of $11.363 billion equals $7.954 billion. Or total write-downs of $3.409 billion.

Yet Downey currently has a total provision for loan losses, plus stockholders equity, of only $1.591 billion. In other words, if the loss rate contemplated by Mr. Whalen were to prevail, DSL would have to add over $1.8 billion to their loan loss provision!

Please make an effort to do the math here, Mr. Whalen! There is a very good reason the market puts a nearly insolvent value in DSL's common equity.

Why Downey Financial is Not IndyMac

"At a market cap of $61 million, DSL is trading at 6% of book. "

"...but the value of this collateral is not 6% of par, in our humble view."

It's pretty sloppy journalism when a blogger doesn't recognize the fact a market cap of 6% of book does NOT at all equate to assets being worth 6% of par. Remember a bank is highly leveraged. If assets depreciate 10%, and equity capital is 10% of assets, you basically have an insolvent institution, and market cap should be zero.

You don't need anywhere near a write-down of 94% of assets for insolvency to occur. Just a small fraction of this. And DSL has about the highest levels of non-performing assets of any financial institution in the country.

They are insolvent if proper mark-downs were to occur. And the re-sets of negative am loans is nowhere near done. Not even close. These re-sets continue unabated through 2009.