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Doral Financial Corporation
Where the Money's Going...

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By reinhs
November 4, 2005

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Hi Guys,
I had a nice talk with the Vice Chairman or Doral yesterday afternoon. Nice guy. For what it's worth, in the past 9 months his stock in Doral is down roughly $39M. That being said he was in pretty good spirits. I told him I was concerned about the large decrease in cash since last quarter. The answer was just what I would have liked to have heard. Since this sales issue has come up Doral has stopped selling loans for the short term. They have been using their own cash to fund them to keep the books clean, and that explains most of the drop from 2.7B to 1.9B. They will start selling again in Q4 and the cash number should look much better in Q4 and Q1. My fear was that they were running in the red and bleeding the cash away. Instead they are basically using the cash to allow them to do business without further complicating the current issues. Seems like a good use to me.

As far as the sales issue, I still can't fully comprehend the magnitude of what these guys are up against. The numbers they gave in the Q3 release were worst case, all sales go away. If that were the case, interestingly enough, the IO strips also go away. You can't have a strip if you never had a sale. So in that case the strips write down to zero and the assets go WAY up. They later have a windfall as they sell the loans for real. While he said the interest spread won't be as good as it was a few years ago, he said he was expecting very good upcoming quarters and they would have no problem at all making money going forward. He made it clear that business was good and getting better.

When I asked him about how the heck all this mess gets resolved over 5 years of questionable sales with different interest rates and spreads he gave a very "Godfather" like answer which was a little strange, but sounded right. All of the big banks of Puerto Rico were going to have to get together in one room with the lawyers and the accountants and they were going to have to do all the numbers together. They are so intermingled between the banks that none of them can do it on their own. When I gave a sigh that said something like "Well, that should be complete before 2010" he very optimistically stated that he expected all of this to actually be wrapped up pretty soon. Possibly by the end of the year. With the holidays coming, I'd be stunned if it were that fast but he made it extremely clear that everyone at Doral, everyone at all of the other banks, and all of the investors...REALLY want to have this over with so they aren't wasting any time trying to get it done. It was my impression that they have known about this "new" issue for a while, were hoping to have it cleared up by the 10th, and concluded last week that they weren't going to make it after all. If that's the case, they may not be just starting, like I feared, but well on the way to resolving these sales issues. We'll see, I'm just guessing from the way he talked about it.

Finally, he said that the folks working on the inside were actually in very good spirits, all things considered. They were optimistic, they feel the future is bright, and they can't wait to have this behind them. It's obvious they still have every belief that Doral will not only pull through this without danger, but things will be better soon.

Now... Take everything I just wrote, read it again, and take it all with a grain of salt, maybe the whole shaker if you can handle it. Doral insiders have been optimistic through this entire thing. They bought stock in the $40's before all of this happened and they bought millions worth around $42.50 or so after the first drop. It could be that things are indeed sunny, though interest rates are currently tight, or it could be that all of them are amazingly over optimistic and flat off their rockers. It's ALL too possible the stock could cut in half again from here before things get better. It's obvious that there most likely will be no news before the end of the year at best, maybe much longer. As the former CFO up until 2003, it was obvious he had no fears of being in cash trouble as they go through this, and I guess he'd know, that just wasn't an issue at all to him. He also knows, while he has lots of faith in the company and future, that it will take a whole lot of time and explaining before investors really come back.

Be very careful what you do from here. Please don't take this as "Senter said there wasn't danger and things are peachy!" Insiders have certainly been wrong before and optimistic while all this was falling apart. My non-expert opinion would be to hold tight for the release, read the real data, and then make up your mind. Sorry for the babble and talk to you soon,
Senter


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