Peter Pays Paul

Bloomberg.com published an article yesterday about the decline of MetLife stock and linked it to the potential for commercial mortgages to fail. However, either the stock purchasers are unable to do simple algebra or the reporter linked the decline to something incidental.

MetLife Drops as Commercial Mortgage Defaults Loom

MetLife Inc. and Prudential Financial Inc., the largest U.S. life insurers, declined in New York trading on concern that losses on commercial mortgages will surge as the recession deepens.

No. 1 MetLife dropped $4.53, or 12 percent, to $32.88 at 4:02 p.m. in New York Stock Exchange composite trading….

MetLife’s commercial mortgage portfolio totals about $36 billion and accounts for about 12 percent of invested assets….

The portfolio’s average loan-to-value ratio is 57 percent, and as of Sept. 30 less than $2 million of the loans were delinquent, Kandarian said.

MetLife Drops as Commercial Mortgage Defaults Loom.

Notice the following items:

1. MetLife’s stock fell 12% and the total value of MetLife’s commercial mortgage portfolio is about 12% of invested assets. Mathematically this means that MetLife investors must have thought that the entire commercial mortgage portfolio was going to fail in order to generate this type of fall.
2. The average loan-to-value ratio is 57%. Meaning that on average each property would have to lose about 43% of value before MetLife would lose money. Possible? Yes. Likely? No.
3. Currently, $2 million of $36 billion (yes with a ‘B’) in commercial loans were delinquent. That is less than 1/100th of 1%. Even if this number tripled it would only equal a 0.0167% delinquency rate. Multiply this by 12% and you have the true impact on the MetLife portfolio caused by commercial mortgages.

If the stock price truly fell because of the expected defaults on commercial mortgages, this is not based on the mathematical fundamentals. Any fall in stock price would be due to irrationality in the market. Market foolishness.

However, it could be that the market is not foolish and that MetLife did fall in value for a legitimate reason. However, this reason is not related to any expected delinquencies in commercial mortgages. Then we have an improperly linked cause and effect. Foolish reporting.