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%