Class Action Lawsuit Filed Against Downey Financial

"On May 16, 2008, a class action lawsuit was filed in the United States District Court for the Central District of California against Downey Financial Corp."

California Comptroller Report for April 2008

The California State Controller has released his Statement of General Fund Cash Receipts and Disbursements for April. Here is the summary analysis.

Totals from the three largest taxes show a declining rate of growth. In April of 2006 the year-to-date increase in the big three taxes was 10.5% higher than the same period of the prior year. In 2007, the growth was 3.1%. By April 2008, the fiscal year-to-date growth had slipped
to 2.1%.

Thursday Links: Silver and Steel

• 600 Years of Silver Prices
• Scroll down to the steel price history in this memo. No wonder asset stripping is taking off.
• Stop the Housing Bailout

Downey Financial Reports Higher Incidence of Delinquency When Minimum Payments Reset

Look at this amazing quote from the Downey Financial Corp. quarterly report (10-Q, March 31, 2008):

"A higher incidence of delinquency is expected when the minimum payments reset on our adjustable rate loans subject to negative amortization or interest only payments, whereby the interest rate is fixed for the first three to five years. For example, as of March 31, 2008, there were $976 million of loans subject to negative amortization or with interest only payments within our loans held for investment that have not been modified but had first time payment recasts since December 31, 2006, of which 36.1% were delinquent 30 or more days at March 31, 2008."

I first predicted this on April 4, 2007:

"More and more of the option ARM borrowers are going to be hitting the negative amortization 110% cap. ... When the option ARMs recast and the payments skyrocket, the delinquency rate is going to skyrocket."

Downey is down 80% since then.

What is Countrywide Worth?

Last summer I wrote two posts on Countrywide: Absurd CFC Rumor Presents Shorting Opportunity (August 21, 2007 with CFC at $21.79) and Why Countrywide is Done (August 28, 2007; $19.31).

My view then and now is that CFC is a zero barring a government intervention/giveaway like the Bear Stearns deal:

I just saw something that makes me much more confident in my Countrywide short and put options position. The manager of Second Curve Capital appears to be a Countrywide sympathizer.

Today in the WSJ I see that this viewpoint is continuing to take hold:

Investors remain skeptical that Bank of America Inc. will end up acquiring Countrywide Financial Corp. at the estimated $7.16 a share price agreed to months ago, and the company’s stock is continuing to sink in trading today.

Wednesday, Standard & Poor’s equity analysts chimed in, saying they believe Bank of America “will renegotiate a lower price due to large losses in CFC’s loan portfolio.” They value shares at $6 a share, on the expectations that the deal will be reworked.

In their research note An Involuntary Transaction: Why BAC + CFC May Never Close, Institutional Risk Analytics writes, "Given the outline above, our view is that the equity of CFC is worth $0."

I have no position in CFC but I own puts on a number of other lenders: BKUNA, CNB, COF, DSL, and SOV.

NYT: All of Inflation’s Little Parts

Neat graphic in the Saturday New York Times.