Downey Financial: Another "Worst Scenario" Case?


I like to be optimistic. I hate to be all doom and gloom. When someone tells me I’m exaggerating how bad things are, I’d like to think they’re right. I just find it hard to believe anyone at the moment.

Experts said Fannie and Freddie would never need an actual bailout. Wrong. Washington Mutualrefused to fire Kerry Killinger as CEO. Now he’s gone. And Downey Financial is being warned to shore up its finances—again—even as it continues to say it has enough cash.

This last item really caught my attention. The Downey Financial press release came out after the bell on Friday, making it sound as though coming up with more capital would be no problem! The bank has already sold $110 million in real estate—no small feat in California these days, though I can only imagine what the real estate was worth a couple years back.

In the days after IndyMac was taken over by the FDIC, Downey management was the first to say “all is well at our bank.” On July 14th, the bank released a press statement saying, “Downey believes its current source of funds will continue to enable it to meet its obligations while maintaining liquidity at appropriate levels.” The bank said it had gotten enough new capital from its own holding company and from a real estate subsidiary (ok, moving around money inside the same entity) to keep its capital ratios above “well capitalized standards.” It also said it had access to more than $3.4 billion in liquidity, most of that from the Federal Home Loan Bank. That week, Downey shares tripled in value.

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But customers weren’t buying it, and they withdrew a half billion dollars worth of deposits in July. The company reported a quarter billion dollar loss, and lost both its Chairman and CEO.

Still, by mid-August, the bank said deposits were again growing, and Downey had recovered 45 percent of July’s outflow. All is well.


Some analysts lowered the stock to a sell, or, in the case of Lehman Brothers, stopped covering it at all, saying the bank’s challenges were beyond the scope of analysis. But Audit Integrity said that by its metrics, Downey Financial has an only 3.1 percent probability of “materially” restating its Q1 financial statement.

And in late July, 12 days after IndyMac’s failure, Keefe Bruyette lowered DSL from “Outperform” to “Market Perform,” (hmmm, not a “sell”), and set a new price target of $3 a share. By the way, shares did pass $3 on Friday, before the news came out about Downey’s new capital-raising requirements.

But I’m sure we don’t need to worry.

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