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Talk Me Down From the Wells Fargo Ledge

by: Paul Kedrosky October 01, 2008 | about stocks: WFC    
Paul Kedrosky

Paul Kedrosky

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Will someone please talk me down off the ledge with respect to Wells Fargo (WFC)? I don't understand why the bank is being treated with kid gloves through the current credit crisis. Yes, it is better capitalized than its failed mortgage drug-dealers, and yes, it didn't have as much exposure to some of the more deranged crap, like Option ARMs. And that's good.

But consider the issues. I have been spending an inordinate amount of time examining Wells' origination geographies, the $24-billion in mortgage-related Level 3 assets, the historically low loan loss provisions, the construction loan portfolio, the exposure to a weakening consumer economy, etc. I just don't understand why so many people are seemingly so sanguine about WFC. Granted, issues there will happen in a different way and at a different speed, but that's not the same thing as saying that the company is adequately provisioned for problems ahead.

Another tip-off, at least for me: The company has yet to buy any of the broken banking assets on the market. While some might chalk that up to conservativism, I'm more concerned that it's a nervous company seeing a weakening balance sheet ahead and that it doesn't want to make larger commitments.

Can someone talk me down off the ledge here? Thanks.

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This article has 42 comments:

  •  
    Oct 01 05:31 PM
    Nope. Can't. I've been wondering the same thing and asking the same questions and scratching my head so hard it hurts. You forgot to mention their $83 billion HELOC portfolio.
    Reply
  •  
    Oct 01 05:49 PM
    they need to show up their books and their level 3 portafolio to see what is in it, otherwise your guess is as good as anybody else's
    Reply
  •  
    Oct 01 05:51 PM
    Its very simple. You can't compare loan portfolios of banks (eg. commercial mtg, construction, HELOC, etc) the way you have. They are just not apples to apples. Assessing them accurately is dependent on determining what each bank risk and credit policies have guided the facilities within each portfolio. For example, a portfolio of $10B in construction loans at bank ABC could be completely different than bank XYZ due to bank's different lending guidelines. WF is probably the most conservative big bank when it comes to LTV, cost approach, lending out of footprint and loan structure to name a few. Do some more homework and you'll find that once you dig in you'll feel good about backing off the ledge.
    Reply
  •  
    Oct 01 05:54 PM
    I'll tell you what my thinking is. Yes, I'm a terrible simpleton. Warren Buffet has 9% of WFC. Of all the banks out there...this is the one that can pick up a phone and get money if and when it needs it. Oh...I know...far to simple. I gotta admit...I ain't got no MBA.
    Reply
  •  
    Oct 01 05:55 PM
    Paul

    WFC is one of the favored four (along with Citi, BAC, and JPM) that have annointed by the FDIC and Warren Buffet to save the banking system. You need to get with the program and stop criticizing that sacred cow.
    Reply
  •  
    Oct 01 05:55 PM
    God (Warren Buffet) owns a huge chunk - so everyone thinks it a safe bet. It is not.
    It's now above it 2006 high! That is nuts.
    Reply
  •  
    Oct 01 05:56 PM
    And...I do a bit of real estate. I know that WFC's lending guidelines over the past 5 years have been stricter than other banks. I have six loans through Countrywide, and five through Washington Mutual. None through WFC even though I do all of my depository banking with them. They simply wouldn't offer me the right terms for me as a borrower. They lost market share because of it. Now they're getting that market share back, and in spades.
    Reply
  •  
    Oct 01 06:04 PM
    what about USB, isnt there a "favored five"?
    Reply
  •  
    Oct 01 06:09 PM
    And let's not forget the accounting red herring they sprung on us last quarter, when they beat expectations not by outperforming but rather by changing their write off policy from 120 days to 180 days past due. Nicely discussed in the June 18th Seekingalpha article, entitled "Wells Fargo Lays Bear Trap on-Wall-Street". And let's also not forget that their largest (or, should I say, former largest?) shareholder, Berkshire, recently stopped providing deposit insurance in excess of the FDIC limit.
    Reply
  •  
    Oct 01 06:13 PM
    When did BRK ever provide deposit insurance?
    When did they discontinue?
    Did they discontinue for WFC or for ALL banks?
    Reply
  •  
    Oct 01 06:15 PM
    Paul, Don't forget, when WF came out with their Q results we all heard terms like, amazing, unbelievable, extraordinary, etc to describe their report... Perhaps they were... Do you see any amendments in WF's future?
    Reply
  •  
    Oct 01 06:28 PM
    Wells Fargo is the only AAA rated bank ( by s&p & moodys), now in the United States, that should tell you something about their strength. Yes, they were exposed to write off's, mainly because of their Home Equity portfolio and sub-prime loans, but they refused to get into the option-ARM / neg-am arena, which was primarily responsible for the mortgage mess that we are in today. Their capital ratios and credit ratings are stronger than virtually all of their industry peers. In just a few words: Wells Fargo is a safe Bank!!
    Reply
  •  
    Oct 01 06:40 PM
    Moody's and S&P are a lagging indicator. I'm long WFC, but don't make a decision based upon Moody's and S&P rating. They get it right only AFTER the event. Enron is a great example: query.nytimes.com/gst/...
    Reply
  •  
    Oct 01 06:45 PM
    Instead of taxpayers bailing out Wall Street, would it make more sense for Wall Street to bail out Wall Street?

    The market lost over a trillion dollars earlier this week. Those with the most to lose in the event of continued difficulty (and who have the most to gain by a strong turn-around) are wealthy individual and institutional investors. Why not put together a market-sensitive private entity (e.g. something similar to a mutual fund or index fund) and give corporate America a too-good-to-be-true tax deduction allowing them to deduct, say, 60% of their investment in this entity. This approach would be aimed at large investors. The entity would issue say a billion shares at $1,000 per share (or 100 million shares at $10,000 per share and the money (a trillion dollars) would go to a bail out fund.

    The one-time deductibility of these monies would not amount to a government payout because these investors are already maximizing their deductions. They would simply shift focus in order to take advantage of the larger write offs.

    Isn't this better than a simple government bail out? what am I missing? Why am I the only one who has thought of this?

    Ray Bourhis
    37 Redwood Drive Box 773
    Ross, Ca 94957

    415 407 7773

    RFBourhis@aol.com


    Reply
  •  
    Oct 01 07:08 PM
    Paul -- Wells didn't pull the trigger on WAMU and WACHOVIA because of two things -- they won't dilute their earnings so much hurting their shareholders and their culture -- not because they feared any problems within their own portfolio-- it has always been this way with them -- just look at their acquisition history . Also forget the issue of increasing the write-off period from 120 days to 180 days -- the amount of loans impacted by this is significantly less than the excess reserves they put back in the 2nd quarter --and that WAS excess reserves. When they remove the mark to market this bank is going to be very strongly capitalized compared to its peers --they are not the ones out there selling the securities at basement bargain prices to get cash -- so this has hurt them probably more than others and eliminating it will then help them more than others. It is buying quality loans from cash strapped financial institutions furthering strengthening its portfolio. Look at its revenue growth over the past year in spite of the economy, financial crisis, liquidity crisis etc. --double digit .Look at its margin. They will be least hurt by the current environment because of credit quality, strong capital position and significant liquidity (deposit base --not Warren) -- they are also still able to grow while others must shrink due to low capital --deposits are flowing into this organization daily further fueling their abiliy to grow while others are retrenching -- that is why so many are so high on this company. Something that is difficult to determine just by looking at the financials is the culture -- conservative in terms of risk, aggressive sales, and customer focused (which is why they did not issue those ARMs --couldn't see how it would help the customer) --they are not focused on short term quarterly results -- and they are not a company that believes big makes you better --they believe being better will make them big. Quite a different culture than the greedy market share driven organizations that are now falling by the wayside. Along with what P4321 states above about differences in loan portfolios --it is also a difference in the decision-making process by the management team at that bank --may be hard for people to believe in this day and age but they have integrity. They do the right thing for their shareholders, their employees, and their customers. It has added some protection to the their balance sheet. They are reeping the benefits now, and will be positioned to outperform their peers significantly well after this crisis is over.
    Reply
  •  
    Oct 01 07:13 PM
    alambrose

    USB hasn't gotten any sweethart deals from FDIC - at least not yet. It's hard to tell whether they are in the club or not.

    USB is a well managed bank, but its overpriced right now. Strongly suggest you take your profits and sell. I did today and will not be buying any bank stocks until (1) the buyout is passed and (2) there is some evidence that it actualy works.
    Reply
  •  
    Oct 01 07:23 PM
    Wells did originate a lot of sub prime, but had the good sense to sell those loans off and to tighten their standards in the last few years. The reason they are not buying yet is the deal hasn't passed so the government benefits that will be available to buyers aren't clear yet. They will be top players and beneficiaries of restructuring these mortgages and helping America de-leverage.
    Reply
  •  
    Oct 01 08:08 PM
    I think you very right to be confused. You didnt even mention the fact that they have 170% of the amount of their capital in HELOC's, with a large % of those in california.
    Reply
  •  
    Oct 01 08:09 PM
    I haven't done much research on WFC. However, my feeling is that they have some pain to face ahead. I don't think the banks can bottom unless WFC faces the music. This is based on my experience in the mortgage industry and the types of mortgage products that they were offering.
    Reply
  •  
    Oct 01 09:27 PM
    Ask any banker at Wells and they will tell you that they have seen more deposits in the past two weeks than they have seen in the past two years. And considering that they pay much less than other banks on the deposits, you can only imagine the spread that they are able to make.
    Reply
  •  
    Oct 01 10:30 PM
    jt79: Moody still holds, and said that they would continue to hold the United States Government as AAA, even if the bail-out passes. See anything wrong with this picture?
    Reply
  •  
    Oct 01 10:31 PM
    High YieldsHarv: And Nevada!
    Reply
  •  
    Oct 01 10:41 PM
    They adopted "creative accounting" for one thing.

    They had a large pool of home loans about to go 121 days late on payments.

    So instead of putting them on the books as delinquent, they came up with the idea that a lone really isn't delinquent until the payment is 180 days late.

    That was a month ago, so a month from now will be interesting; 240 days anyone?
    Reply
  •  
    Oct 01 11:24 PM
    I would definitely say WFC's days at these lofty levels are numbered based on the chart but of course I can't put my money where my mouth is.
    Reply
  •  
    Oct 02 12:10 AM
    WFC is a very good bank. It is also very good short from here - if you only could do it. Very little room to the upside, a lot of room to the downside. Yeah - their HELOC situation is scary.
    Reply
  •  
    Oct 02 12:13 AM
    let me just start off by saying, for those of you that are supporting WF and have optimistic views about their future, your on the right track! and those who have done nothing but bad mouth, bash and otherwise down talk WFB, let me say this, from someone that works at WF and has for many years now, WF is strong and safe and is not going anywhere (as far as the banks failing). WF has been around for well over 150+ years and has gone through the great depression and several other hard financial times in history and still come out strong. oh, and by the way, to those who think they know exactly what WF is doing and why they didn't take WAMU or Wachovia, get your stories straight before you start rambling off info like some know it all. Yes, WF is a very conservative bank,it is also the ONLY bank in AMERICA that is AAA rated, AND the reason that WF didn't jump for WAMU and Wachovia is because WF tends to analyze every angle of every possible deal before they jump into a "pool of crap". WAMU and Wachovia both had a lot of baggage they were carrying with them from the mortgage dive and WF is smart enough to know not to put there name, rating, share holders, employees and more importantly their customers in any sort of risk or uncertainty by allowing other banks to walk in our "home" with dog crap on the bottom of their shoes. and unlike BOA or Chase, WF is not out to be the biggest bank ever, we are out there to serve out customers and to ensure the well being of our customers and their financial well being. we will expand to the east soon enough, but we are waiting until all the crap in the economy has stopped hitting the fan and the maids have cleaned it off. our 160,000 team members know how strong we really are and so does the market. oh and customers at other banks are fully aware of just how strong and safe WF really is as they continue to bring thousands and hundreds of thousands of dollars to keep at WF everyday! WF has not seen a deposit flow this high in a while, and something of that nature can only mean one thing, bank stability! so stick that in your pipe and smoke it.
    Reply
  •  
    Oct 02 12:30 AM
    Probably the best run bank in USA. I believe they are one of three (3) AAA rated banks in the world. That includes Switzerland. Is this deserved? Probably not, but it was not too long ago. Likewise their stock price is probably out of whack compared to inherent risk. But if they come out of this half way OK, they will be worth much more than before.

    The problem is nobody's safe in this s&*t storm. They have a lot of mortgages in California and Nevada, and if prices keep going down it will be beyond anybody's ability to manage. They also did a lot of piggy backs with the $84B of HELOCs, probably OK in normal times, but those are long gone.

    Bottom line: probably the safest bank around because of Buffet AND Fed support. People are calling for public triage on banks: they will be a winner in that scenario, too. Having said all that, I wouldn't buy their stock, but I wouldn't short it either.

    Their fate is god's hands at this point. If foreclosures persist they will get into serious trouble, but so will everybody else. And we know this bail-out does nothing for foreclosures and housing prices, so if they're going to need help it will have to come later.

    Last bank to fail. Turn out the lights when you leave.
    Reply
  •  
    Oct 02 12:37 AM
    Regarding USB, I too have taken my profits. Loved it at 22, can't see staying in at 36 across the earnings call. It's a great bank, which is to say it will still be in business 5 years from now, but I can't see paying so much for it. I don't see how WFC is as strong as USB, and I suspect it's surviving mostly on reputation at this point. If you're long, I'd get out. Where's the upside?
    Reply
  •  
    Oct 02 12:38 AM
    They are one of three (3) banks in the world with a AAA rating. They probably don't deserve it anymore, but that's how the bank is run. Likewise, their stock over valued given the risk.

    But nobody's safe in this s*&t storm. They will have a lot of foreclosures over the next 3-4 years, and nobody knows how bad that will get.

    But its obvious they have Buffet's support, and he's doing major PR duty for Paulson and Bernanke. So WF has universal support in the bad bank good bank triage scenario.

    Worst case, last bank to fail. Don;t go long or short, but put your money there.
    Reply
  •  
    Oct 02 12:38 AM
    Wellsguy, WM made it through the Depression too.
    Reply
  •  
    Oct 02 01:20 AM
    Management....

    Has their been any management changes? Have they imploded, embarassed themselves or shot themselves in the foot during the credit crisis? I'm not concerned with them buying crap assets at crappier prices. Investors will flock to quality in an environment such as this and while the shares have enjoyed a substantial rise (57% since I bought) I'll continue to hold knowing it'll likely come down to a more moderate valuation and be great over the long-term.

    (I own WFC).
    Reply
  •  
    Oct 02 08:40 AM
    Lehman Bros made it through the Civil War and the Depression. That alone is not a qualification.
    Reply
  •  
    Oct 02 08:45 AM
    Rather than focusing on ratings.....How would the bank look if house prices declined by 50-60-70% from the peak.......we are at what...20-30% decline from the peak?


    This could get ugly for every company out there.....regardless of what sector they are in. This was the largest housing bubble in history. There is a lot more carnage ahead.
    Reply
  •  
    Oct 02 09:58 AM
    "WF has not seen a deposit flow this high in a while, and something of that nature can only mean one thing, bank stability! so stick that in your pipe and smoke it."

    It can also mean something else; a bubble.

    If the perception of WF being safe is shattered, that deposit flow will reverse rapidly.

    Remember this, big money guys a WF invested a fortune in the company stock and lost a big chunk of it in short order.

    They then change the accounting rules to make a loan in default at 180 days instead of 120.

    There's a lot of funny business going on here.

    What to watch? Look for insiders selling the stock through the SEC filings.

    The big guys have gotten their money back plus a little more. So they will take it off the table when the end is near.

    That's what this bailout is all about anyway; giving the insiders an opportunity to get their money back.
    Reply
  •  
    Oct 02 11:40 AM
    I live in California. If you listen to what they say about their loans you can only conclude that they are lending to a shadow California where prices are still high and home equity still means equity. I wish they would tell me where this is. I'm ready to move there.
    Reply
  •  
    Oct 02 01:02 PM
    You are correct in that WFC is substantially overpiced for the current environment by any rational analysis (just like JPM). However, you do ignore several highly positive factors, particularly the quality of WFC underwriting and the "Buffet Halo" effect. I wouldn't short WFC at the present (if it were legal), but I already sold my JPM and WFC in the recent run up, due to price/risk ratio. I'm only holding a couple of non-US banks and some extremely well capitalized regionals and I'm quite nervous about them. Given a comparable WFC risk adjusted price I'd love to swap, but it's just way too expensive.
    Reply
  •  
    Oct 02 01:51 PM
    nobody mentions that WFC was a HUGE originator of 125% LTV HELOC's!! How they have managed to remain "unscathed" with this ticking time bomb is beyond my realm of comprehension. They may have had conservative underwriting guidelines but it doesnt change the fact that ALL of the homes that these HELOC's are tied to are now WAY UPSIDE DOWN! WFC will have to come clean eventually!
    Reply
  •  
    Oct 02 03:06 PM
    A lot of you are talking about the drop in housing prices impacting HELOCs that Wells has made -- housing prices have no impact on the HELOC unless the customer runs into financial trouble -- if you invest in a bond that you intend to hold for 5 years at 6% -- and you hold it until maturity you are going to get your 6% --does it really matter to you if bond prices drop while you are holding it? Of course not. It only matters if you need the money before maturity or the entity that owes you the money for the bond goes under -same with HE loans -- not sure where the guy gets 125% of LTV but I know that wasn't done - with the drop in prices their cushion is significantly reduced and in some cases they now have over 100% LTV on the home --but let's remember that 95% of Americans are NOT behind on their mortgage and have no problem repaying it and their HE -- they are not going to stop paying their mortgage just because values have dropped -- they know there will be a rebound down the road -- have you stopped paying your mortgage or home equity loan? I haven't --and if values drop significantly I am still going to pay my mortgage or HE-- that still leaves a comparatively high 5% that are behind on their mortgage -- but a number of those will be worked out -- further reducing the exposure --and most people are not going to try and sell their homes and move in the current environment --so in terms of collecting the debt the only risk left is if the person can not afford to pay -- and that is because of job loss.
    I would be looking at the unemployment numbers in Wells' footprint to see how significant the impact will be -not housing values. It is only after the fact that housing values will impact the amount of the loss --
    That is not to say housing values are not important -- losses will be higher tha in normal economic cycles if unemployment continues to go up because of the housing values dropping -- can't get anything out of the collateral to offset part of the loss ---- having both high unemployment and dropping housing prices at the same time makes it a worst-case scenario -- but it will be unemployment that drives this -not the drop in housing prices.
    Reply
  •  
    Oct 02 07:01 PM
    The unemployment numbers tomorrow, Friday, Oct. 3rd, will provide
    everyone with an excuse to dump WFC common. RB1253 has it exactly
    right. The double whammy is what will hammer the common. Unemployment + no equity left in many homes because of the 40% drop
    in prices in many areas of California will cave in WFC. I live in a very affluent community and even here the complaints are many about the
    outside condition of neglected homes. Neglected because the maintenance expense is unaffordable when your income stream has
    been replaced by an unemployment check. Mortgage + HELOC payment? Well, maybe when things improve.

    Disclosure: synthetic short portfolio of WFC
    Reply
  •  
    Oct 03 10:53 AM
    Unemployment remains flat -- and the deal announced this morning should convince the pessimists that Wells is not hiding a bunch of bad loans -- you can not do this deal the way Wells is structuring it if you are about to implode. However - this should at least force to make a decision -- you can no longer sit on the ledge -- either you believe the mangement at Wells and get off the ledge or this deal should make you jump.
    Side note--Here is small but positive sign of a bottoming -- foreclosures, which were going to anyone who wanted to buy at the low price and rarely had any competitive bids, are beginning to see multiple bidders on properties -- that is the first sign that investors are seeing a bottom and need to get into the market to make some money on these properties. Small but overlooked sign that the tide may be turning -- I know we still have a long way to go but maybe this is an indication that the next light we see at the end of the tunnel will truly be a light at the end of the tunnel and not another train coming at us.
    Reply
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