FirstFed Financial Corp., a Los Angeles thrift company battered by losses on option adjustable-rate mortgages, is taking the seemingly counterintuitive step of spending its capital to buy back debt — and may be setting an industry trend in the process.

On Friday, FirstFed moved to eliminate much of its debt, announcing it had offered to buy out bondholders for 33 cents on the dollar. Bondholders have until Thursday to take it up on its offer to purchase $150 million of bonds that have lost much of their value as the company's loan portfolio has weakened.

Those who opt in would lose much of their initial investment, but are guaranteed at least something in the event that FirstFed's financial situation worsens and it defaults on the notes. Those who hold on to the bonds are betting that the $7.4 billion-asset FirstFed will weather its financial difficulties and that they will eventually recoup their investment.

FirstFed said Friday that it will finance the transaction with available cash, "which may include proceeds from capital raising transactions." It did not say why it was buying back the notes, and on Monday its president and chief operating officer, James P. Giraldin, declined to answer questions about the deal.

Jeff Caughron, an associate partner with Baker Group Ltd. of Oklahoma City, which advises banks on managing investment portfolios, said he expects other banking companies to take a similar approach to eliminating their debt.

"We as a country and our banking system are going to go through a long period of deleveraging, and to the extent that bank can reduce levels of debt and leverage they will do so," Mr. Caughron said. "This sounds to me like an attempt to achieve that very thing — reduce the size of the balance sheet and debt outstanding."

The risk for FirstFed in buying back its debt is that it may need the capital down the road if the pace of loan defaults picks up, as most industry observers expect.

The bonds are privately held, so no trading prices were available.

The three $50 million bonds, which mature on June 15, 2015, March 15, 2016, and June 15, 2017, reset from a fixed rate to the London interbank offered rate. The 2015 and 2016 bonds reset at three-month Libor plus 1.55% after during 2010, with 5.65% and 6.23% until then. The 2017 bond is at 6.585% interest until 2012, and then resets to three-month Libor plus 1.60%, information from Carson Medlin Co. shows.

FirstFed has been an active originator of option ARMs in recent years. Losses have piled up in recent quarters as real estate values plummeted and homeowners were unable to pay their mortgages after the rates reset.

The company reported a loss of $156 million for the first nine months of 2008, and at the end of November it said its ratio of nonperforming assets to total assets was 7.54%, versus 2.34% a year earlier.

FirstFed shares, meanwhile, have been beaten up by short-sellers. In August an analyst covering FirstFed pointed out that short interest in the company had increased to 93% of the outstanding shares and 108% of the reported float as of Aug. 12. The shares jumped about 100% in value, peaking at $20.50 on Sept. 23 and 24 in the weeks after the August report, but have fallen about 80% since early September.

On Monday the shares closed at $2.04, down 17.41% from Friday.

Despite its troubles, First Fed's thrift unit, First Federal of California, is still considered well capitalized, though losses on option ARMs are taking a toll. According to Federal Deposit Insurance Corp. data, its ratio of total risk-based capital to assets fell from 21.44% at the end of the third quarter 2007 to 15.87% at the same time in 2008.

Capital levels could be further challenged in the next few years, when hundreds of billions of dollars in option ARMs are expected to reset industrywide.

A February 2008 report from Barclays Capital said that $312 billion of option ARMs would reset between 2008 and 2012 and that $227 billion would reset in 2010 and 2011.

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