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Wells Fargo- does it need capital?


Guest dealraker
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OK, here it goes.  I actually worked as a bank research analyst covering small southeast community banks way back in the 1970's.  This writer owned about $100,000 of a small North Carolina bank stock in the early 1990's and I sold it after it began selling for 3 times tangible book value which I thought was somewhat hilarious as returns on assets and equity were gradually falling and the accounting they were using for occasional mergers was fake (i.e. huge write-offs of past-current-and future expenses).  Went to California and bought the Asian-American bank stocks and ended up with (yes this is accurate) 10 times my money pre-tax.  Sold, and the IRS and State of NC got a good part of it.

 

But in other words I'm not ignorant of the banking business or bank stocks- which is what I'm trying to convey.  I have bought a large amount of Wells stock and put 100% of one of my retirement funds into PFF (preferred stock) when the security marched downwards.  I have actually sold both of these making very good money after having not owned a bank security for 8 years.

 

So here is the question I'm presenting?  Is Wells Fargo truly capitalized and do they need capital at all?  More coming in than going out all the time- but if they had to "settle-up" right now my guess is  they'd be $100 billion or so short.  Talked to a friend/builder in California and he says, "Wells and all the other banks are still acruing interest on the houses sitting her and the owners/squatters are in them staying behind in their utilities just enought to not get them turned off- but not paying the mortgage at all.  Nobody is even communitcatin with them from the banks."

 

What's the best guess with you guys on Wells- and do we really go back to normalized earnings when Americans are certainly going to reduce their debt levels? 

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Pardon the spellin' errrors as my screen jumps all over the place when I'm writing on this board for some reason and I can't look at it for long.

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If I was to logically argue against your statement, I would say simply: you are relying on a simple anecdote for your evidence, when there is a clear and readily available statistic you can use to get a better picture: delinquencies.  That will tell you actual amounts of people not making payments on their mortgage, and for how long.

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Dealraker, I do not for an instant question your experience or credentials. However to state that Wells is 100 billion undercapitalized after the largest capital raise in its history based on the flimsy evidence of one anecdote should not go unchallenged. I suspect that few banks could meet all of their obligations if forced to liquidate in a very short period of time it is one of the reasons why the FED uses liquidation as a last resort for banks. I do not believe that Wells will be required to liquidate hence hitting the bid  next week in the residential real estate sector is not a realistic expectation. I have heard much anectdotable information that Wells has in fact been the farthest ahead of the curve on loan mods regarding reisdential re.

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100billions???

 

I guess the only way to explain that gap is the difference between Mark to market vs Mark to model.

 

Wells has the earning power to hold their assets to maturity... they don't need to mark them to the market price.

 

However, some ppl like to mark banks' asset using market price. It's somewhat fair when the market is liquid.. but when everybody is trying to deleverage, the market becomes a buyer's market and thus give unrealistic prices.

 

 

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but when everybody is trying to deleverage, the market becomes a buyer's market and thus give unrealistic prices.

 

Whatever the market is willing to pay is the "real" price. The market is telling us that previous prices were unrealistic because the liquidity

was the result of unsustainable levels of cheap money. In the normal course of events, where business cycles are allowed to run their natural course, buyer's markets should be just as frequent as seller's markets, and prices fall on over supply. 

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but when everybody is trying to deleverage, the market becomes a buyer's market and thus give unrealistic prices.

 

The market is telling us that previous prices were unrealistic because the liquidity

was the result of unsustainable levels of cheap money.

 

 

That's part of it.

 

Another part of it is the 17% or so unemployed (counting underemployed).

 

What will the "normalized" unemployment be going forward? 

 

Never a job market recovery?

 

Then there is also the falling knife in some real estate markets that drove lenders to beef up down payment requirements above the nationwide average -- when those markets stabilize the down payment requirements ought to relax a little bit, to more normal levels (reflecting the nationwide average).  There was an article about this very thing beginning to occur in some markets as lenders gain confidence that markets are finding a bottom (they are making that assumption).

 

 

 

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Pardon the spellin' errrors as my screen jumps all over the place when I'm writing on this board for some reason and I can't look at it for long.

 

Hi Dealraker,

 

Click the "compatability" tab next to your address bar...it looks like a piece of paper torn in half.  That will stop the screen from jiggling around when you type a post. 

 

If your browser clears all data and history every time you close it, then you'll have to click that each time before posting when you relaunch the browser.  But that definitely will fix the problem.  Cheers!

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Pardon the spellin' errrors as my screen jumps all over the place when I'm writing on this board for some reason and I can't look at it for long.

 

Hi Dealraker,

 

Click the "compatability" tab next to your address bar...it looks like a piece of paper torn in half.  That will stop the screen from jiggling around when you type a post. 

 

If your browser clears all data and history every time you close it, then you'll have to click that each time before posting when you relaunch the browser.  But that definitely will fix the problem.  Cheers!

 

Ah great. That happened to me as well, like dealraker. Especially when I use IE's InPrivate mode.

 

Wells will be okay, they can earn their spread that will add to equity. Having said, were it not for the govt giving them TARP, I don't think they would be as valuable a company today. Might have taken longer to earn their net spreads as the housing market is ffff-ed ... so is the coming CRE market.

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Thanks for the help on the screen.  Sure would like to see more discussion on Wells- less focus on the slant of my question and more discussion on Wells.

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>>Whatever the market is willing to pay is the "real" price.

 

It's the real price only you have to sell it.

But if Wells can hold it until the maturity why do they have to raise liquidity to fill the hole now based on the current "market" price.

 

That's my only pt.

 

 

 

Just because they can hold to maturity doesn't mean they won't have to take losses.

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Sure would like to see more discussion on Wells- less focus on the slant of my question and more discussion on Wells.

 

 

There is so much to talk about.  I assume you've already read the Q2 & Q3 transcripts?  There is a lot in there that addresses the question of how they are going to grow while the consumer is deleveraging -- one can start simply by observing how much the business is growing this year, in spite of the increase in the savings rate and contraction of credit:

 

https://www.wellsfargo.com/pdf/press/1Q09_Recorded_Comments.pdf

https://www.wellsfargo.com/pdf/press/2Q09_Recorded_Comments.pdf

https://www.wellsfargo.com/pdf/press/3Q09_Recorded_Comments.pdf

 

 

In a nutshell (from the Q1 transcript):

The consistency of our revenue growth is also due to the fact that we did not

participate in most of the problematic businesses and activities that have reduced the

level and stability of revenue at many of our peers. As our peers are busy dealing with

the problems from these activities, and with replacing the lost revenue, we have been

successfully gaining customers and market share that will add to revenue and

earnings well into the future.

 

 

 

https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf

 

While many other banks – and almost every other large

bank – retrenched from lending since the start of the credit crisis, Wells Fargo has remained

open for business, providing over half a trillion in mortgage originations and new loan

commitments to our consumer and commercial customers. And, on a net basis, increasing

on our balance sheet over $119 billion in loans and securities by year end 2008.

The opposite was the case during the irrational exuberance of 2006 to 2007, when asset

spreads were at all time lows and were not priced for risk. At that time our asset levels were

relatively flat - in fact declining in 2006 - while other financial institutions were leveraging

their companies – in some cases growing by double digit rates - at low or no economic

return. We were building our capital in that period waiting for the dam to break and it sure

did. We were also prepared to lose market share and in fact we lost mortgage market share

because we maintained our disciplined lending standards throughout that period.

Earning Asset Growth vs. Peers – slide 5

In the last 1 ½ years, as others needed to retrench, Wells Fargo accelerated it’s growth

taking market share in our chosen markets, increasing the number of households and

businesses we serve and actively working at building relationships that will last forever.

Wells Fargo’s growth in average earning assets, adjusted for acquisitions, from the

beginning of the credit crisis through year end 2008 - 25 percent - was the highest among

our large bank peers and also the highest among the top 9 peers in the U.S. In terms of just

loans, Wells Fargo’s acquisition-adjusted 22 percent growth was the highest among our

peers. Keep in mind that while Wells Fargo has been fully extending new credit, we were

simultaneously reducing high-risk loans, including exiting indirect channels, tightening credit

standards and pricing for risk.

 

Our solid pre-tax pre-provision profit growth is largely fueled by strong revenue growth. In

addition, we have grown revenues at a faster rate than expenses – creating positive

operating leverage. In 2008, Wells Fargo grew revenues by 6.1 percent organically, while

reducing our expenses by 2 percent. None of our large bank competitors had positive

operating leverage last year, adjusting for significant acquisitions.

Relative to our peers, we have had the highest and most consistent growth in top line

revenue net of expense growth over either 1 year or 5 year time periods. Adjusted for

acquisitions, none of the large peers had positive pre-tax pre-provision profit growth last

year. Our relative performance is due to our faster loan and deposit growth, as well as the

fact that we have not had the revenue losses that all of our peers have had in connection

with problems from “covenant-lite” leverage lending, structured investments, proprietary

trading, or market making in sub-prime or exotic securities because we have never had

material exposure to those activities.

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Talked to a friend/builder in California and he says, "Wells and all the other banks are still acruing interest on the houses sitting her and the owners/squatters are in them staying behind in their utilities just enought to not get them turned off- but not paying the mortgage at all.  Nobody is even communitcatin with them from the banks."

 

This is from Q4 2008 -- it sounds like Wells Fargo communicates with delinquent borrowers at a higher rate than this anecdote from your builder friend suggests.

 

Through our active communication programs, Wells Fargo Home Mortgage has reached

94 percent of its customers who are two or more payments past due. For every 10 of these

customers, we have worked with seven on a solution, two declined help and one could not

be reached. Of those who received a loan modification, one year later, approximately 7 of

every 10 were either current or less than 90 days past due.

 

https://www.wellsfargo.com/pdf/press/4Q08_Recorded_Comments.pdf

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