Hedge Funds Cuddle Up to Downey Financial

Following our discussion last week of asset quality at the largest savings and loans, TheStreet.com Ratings took a closer look at Downey Savings & Loan, a $13.4 billion institution with headquarters in Newport Beach, Calif., and the main subsidiary of Downey Financial Corp. (DSL Quote).

Downey Financial has been frequently pilloried in the news during the real-estate crisis because of its focus on option-payment mortgages. Shareholders lost 70% of their market value over the past year, and 39% year to date, as of the market close on April 7.

With the stock selling at a price-to-book ratio of less than 0.4, some major investors consider the holding company a bargain. In a March 11 SEC filing, Citadel Investment Group reported it had taken a 4.98% stake in the holding company. Legg Mason Capital Management (managed by Legg Mason Inc. (LM Quote)) reported a stake of roughly 7% as of Dec. 31.

Downey Savings reported nonperforming assets comprising 7.38% of total assets as of Dec. 31, a shocking increase from 2.21% the previous quarter. ...