Short Sellers Still Betting on Glenfed Stock

Glenfed Inc.’s stock has tumbled from $15.50 a share about seven months ago to less than $7 today, but the Glendale thrift is still a favorite target for short sellers--investors who bet on stocks to fall in price.

Even the dreaded Feshbach Bros., the nation’s best-known short sellers, have a short position in Glenfed, the state’s third biggest savings and loan, mainly because they expect Glenfed’s portfolio of commercial real estate loans to cause problems as the economy sours.

Glenfed’s president and chief operating officer, Keith P. Russell Jr., said the short sellers are overstating potential problems with the thrift’s commercial real estate loans. “We’re not losing a lot of sleep over them,” Russell said.

And other big S&Ls;, such as CalFed of Los Angeles and HomeFed, a thrift based in San Diego, have also become a favorite target of the short sellers.

But Tom Barton, a partner in Feshbach Bros., says the Palo Alto investment firm is pleased with its holdings in Glenfed, the parent of Glendale Federal Bank. Barton said Feshbach Bros. started shorting Glenfed about seven months ago when the stock was “in the mid-teens,” and he thinks the stock will go down further.

Glenfed’s stock closed Monday at $6.375 per share.

Barton is basing his expectations on troubles in Glenfed’s big $2.56-billion portfolio of commercial real estate loans. Glenfed has $87 million as a “loan-loss reserve” to cover potential losses from bad loans. That equals about 15% of the S&L;’s “nonperforming assets,” a category that includes loans that are past due and repossessed real estate. But Barton said that’s not enough to cushion future problems. He thinks that Glenfed will have to increase its loan-loss reserve, thus cutting into the thrift’s profits and possibly hurting Glenfed’s stock even more.

Russell declined to comment on whether Glenfed was planning an increase in loan-loss reserves.

Short sellers borrow shares and immediately sell them; they hope later to make a profit by “covering” the shares, that is, buying them back at a lower price and returning them to the owner.

Barton and the Feshbachs have plenty of company when it comes to Glenfed. As of Dec. 14, the number of Glenfed shares borrowed by short sellers and not yet paid back (an amount known as the “short interest”) had tripled since Aug. 15 to 5 million. And between Nov. 15 and Dec. 14 Glenfed’s short interest jumped 11%.

Meanwhile, the short interest in CalFed grew 38% from Nov. 15 to Dec. 14, and the short interest in HomeFed jumped 49% in the same period.

Despite the short sellers’ gloomy predictions, Glenfed, which has about $25 billion in assets, posted a profit of $17.7 million in the quarter that ended Sept. 30, down 10% from $19.6 million a year ago.

But in November, Moody’s Investors Service slightly lowered its ratings on about $1.2 billion in long-term debt of Glenfed and Glendale Federal, citing its commercial real estate loan portfolio and predicting that Glenfed would increase its reserves for possible loan losses.

Some analysts who, unlike those at Feshbach Bros., aren’t rooting for Glenfed’s stock to plummet further, don’t agree with Barton’s predictions. Gareth Plank, a San Francisco-based analyst who follows Glenfed for Dean Witter Reynolds believes the thrift will have to increase reserves, but said he thinks that many observers are overestimating the troubles in California real estate.