Oversight pressure felt at Downey
Downey Financial Corp. has been under intense regulatory scrutiny since at least June, according to filings it made with the Securities and Exchange Commission on Friday.
The investigation and pressure from the Office of Thrift Supervision may explain abrupt management changes by the Newport Beach-based lender and its decision to seek a capital infusion or a sale.
Downey, hurt by a surge in mortgage defaults, was talking with the Office of Thrift Supervision in June about boosting its reserves, according to the filings.
In July, the OTS said Downey had “engaged in unsafe and unsound practices” that had weakened its asset quality, earnings and future capital.
That same month, Maurice McAlister, the company’s chairman and co-founder, stepped down. McAlister had run the thrift for half a century, for part of that time with Chief Executive Daniel D. Rosenthal, his former son-in-law. The company also said it was looking for new capital.
“This is probably what led to McAlister’s departure -- it was a consequence of that examination by the OTS,” said Bert Ely, a veteran banking consultant. “So what’s coming out now is really what’s been in the pipeline.”
The new filing also revealed that Downey had been forced to take drastic steps since July to raise cash. It sold some real estate assets and pulled money out of one of its subsidiaries.
About $70 million of the assets sold were bank-owned interests in the cash flow from some of its shopping centers, said Thomas E. Prince, the current CEO. Another $40 million was generated by the sale of retail properties.
Downey raised $109 million in fresh capital but did not say how much more it needed to meet regulators’ demands by year-end. Until it hits OTS capital targets, Downey will be limited in how much interest it can pay on deposits, among other restrictions.
“This is not the final order to haul the poor person out to the gallows,” Ely said. “It’s just evidence of the incredible pressure Downey and others are under to get their act together.”