April 15, 2007

FLASH: Morningstar analyst does the math, figures IndyMac is sitting on an unannounced $1.0 to 1.5 billion loss - on just 2006 Liar's Loans (Alt-A)

OK, I've seen enough. I'm getting even shorter on Monday on NDE with put options - probably some May as well, as they have to come clean soon on what they know. Or go to jail. Yes, the market is fixed, and yes, they may choose the "go to jail" route, and short term there could be a short squeeze on NDE since so much of the float is short, but sometimes you gotta bet on what you know. And if I know one thing, it's that Alt-A (Liar's Loans) and IndyMac are F'd.

IndyMac's market cap is $2.1 billion, net tangible assets of $1.8 billion, and their cash on hand is $541 million. Taking a $1.0 to $1.5 billion loss is a killer. I don't see how they survive. Plus their business model is ruined - the days of funny money are over.

Note - at time of writing I'm happily short NDE.

This is a bit wonkish, but I hope you read the whole article if you want to understand the Alt-A meltdown and IndyMac's terrible position... And pick through the numbers and story and tell me why I shouldn't short harder on Monday.

If you have picked up the paper in the past month, you know that the subprime (also called nonprime) mortgage business has blown up in recent weeks. New Century Financial, one of the largest players in the industry, filed for bankruptcy protection on April 2.

At first, it seemed like the problems were confined to the low-quality subprime business, mainly stemming from firms that were funding mortgages with short-term borrowings. However, we're starting to see problems creeping into higher-quality mortgages, and as a result, we've identified two short-term risks for our bank coverage universe.

If a bank chooses to sell the mortgages, we estimate, in a worst-case scenario, that the loans will sell for just 98.64% of their value. Add the cost of making the loan and selling it for a 1.36% discount, and a bank will take a real and immediate hit to its income statement.

The largest impact would be at Indymac NDE , where writing Alt-A mortgages to sell into the secondary market is its primary business. We estimate that Indymac would lose almost 3 times what it made in 2006. Investors should note that this is just an exercise; in reality, Indymac would stop writing loans if all it could do is sell them at a loss.

The following table shows some of the top Alt-A originating banks, and our estimate of the earnings impact if forced to sell all of their 2006 originations at this severe discount.


Estimated Earnings Impact of Alt-A Liquidation

2006 Alt-A Originations / Estimated Loss / % of 2006 Earnings
Indymac
NDE $70.2 billion / $954 million / 278%

According to our calculations, this is a minimal risk for many of the diversified banks. The thrifts and banks with large mortgage operations, like Indymac, Washington Mutual, and First Horizon, have greater exposure. We worry about these banks, but believe we used a worst-case scenario to show the maximum loss they could incur.

Estimated Worst-Case Scenario for Alt-A Mortgage Repurchases

2006 Alt-A Originations / Bad Loans / Estimated Loss / % of 2006 Earnings

Indymac NDE $70.2 billion / $6.243 billion / $1.561 billion / 455%

14 comments:

Anonymous said...

The five financials with the largest monthly increase in percentage of float shares held short were: Accredited Home Lenders (LEND : accredited home lendrs hldg com
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Last: 9.30-0.01-0.11%

4:00pm 04/13/2007

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LEND9.30, -0.01, -0.1%) at 34.9%; Fremont General (FMT : Fremont General Corporation
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Last: 7.05+0.55+8.46%

4:02pm 04/13/2007

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FMT7.05, +0.55, +8.5%) , 28.1%; FirstFed Financial (FED : Firstfed Financial Corp
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Last: 56.43+0.70+1.26%

4:03pm 04/13/2007

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FED56.43, +0.70, +1.3%) , 19.3%; Downey Financial (DSL : Downey Financial Corp. (Del.) (Holding Company)
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Last: 62.64+0.37+0.59%

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DSL62.64, +0.37, +0.6%) , 19.3%, and IndyMac Bancorp (NDE : IndyMac Bancorp Inc
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Last: 28.97-0.14-0.48%

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NDE28.97, -0.14, -0.5%) , 18.7%.

Mort said...
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bozonian said...

I've got 5 April puts on NDE.

If the "man behind the curtain" isn't exposed by then I'll buy even more for May because the grim reaper is comin' to town for IndyMac.

Anonymous said...

Talk about a stinky pinky stock, run by modern day pirates... arrgghhh!!!

Anonymous said...

i got Jan 08 puts on NDE a couple of weeks ago - soooo happy right now - will ride NDE all the way down over the next 6 months. Looking at 800-1000% return on my investment.

Kerriella said...

This really concerns me. We are buying a home and our loan is NOT with a sub-prime lender. I don't claim to know much about the housing industry but I do wonder what the fallout will mean to regular lenders down the road.

Shakster reporting from Mexico said...

Shorting NDE is allright if the insiders have them pumped up thru their Investment Banking Channels.The downside is fast in the beginning.Then the slow grind down.28.00 is still up there enouph for a pop to the downside.So some thrills at first then the boring stuff.The big hitters still control the scam which is Wall Street.Common sense says get out quick,but the scam is run by masters with alot at stake.
I have been reading about the Lofty numbers of the Dow,and other markets without liquidity.This is something to keep an eye on.The numbers,the percentages,and the share involved are monstrous.This says Millions of investors want out ,but cant sell,just like Housing.Kieth,even if your Puts don't have the benefit of severe downside movements in NDE ,you could still get a call from an options house looking for deals ahead of the wave.Even if the wave takes it's sweet time coming,those puts could become HOT with no fall in NDE.The masters will hide this f-ck-r ,and GE ,so don't expect the fall right away.

stuckinthecity said...

Here is a link to my blog. It is mostly for people from Chicago an Illinois. It has links for our reps to say no to the bail out. Pass it along. thanks.

Say NO to the Sub-prime Bail Out!

Aaron said...

I'd have to agree with Anon up there. I thought about Puts as well, but they are getting expensive. Looking at the chain, I'd say the market has already corrected to some degree. Still, after the earnings release, it's anybody's guess.

Still we know where the industry is headed longer term. :)

Anonymous said...

Everyone is down playing these numbers! But when the tsunami hits don't be on the beach!

Anonymous said...

Here's article by Bloomberg worth reading about before buying any PUTS.

http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=NDE:US&sid=actnwxNCFzhc

I may go short on this too, but I'm going to wait out to see if there's any short term recovery before doing so.

Anonymous said...

The "geniuses" at Goldman Sachs were holding millions of shares of New Century as of December. I can't look it up now since NEW isn't trading anymore. They also had millions of shares of all the other big name sub prime disasters-waiting-to-happen.

Want to know where opportunity is? Where the "masters" screwed up, that's where.

What to do about it is left as an exercise for the reader.

Anonymous said...

PRICES AT THE BOTTOM END bound to rise, only problem being that thats where everyone will be looking for, location, location!!!!

Anonymous said...

Good going Mike "pompous ass" Perry, Frank "how many ways can I swear at you" Sillman , and Michelle "ruthless, pants-wearing wife of Sillman" Minier! You succeeded in running this company into the ground. All the employees you have issued stock options to, all the stockholders, all the employees from your takeovers that were tossed out with the bathwater, all the employees you continually ground into the ground,and don't forget about the employee that had a heart attack and died during one of your take overs, I hope they bite all three of you in the ass. These three are the ones mostly responsible for lending policies / strategies.