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Wells Fargo’s Turnaround: A Mirage?

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George Washington Blog
Friday, April 10, 2009

Wells Fargo is projecting a $3 billion dollar first quarter profit.

But since the Fed is ordering banks to keep the results of the “stress tests” secret, and given the suspension of mark-to-market accounting, can we be sure that Wells has really turned a corner?

Well, Wells was effectively insolvent a short time ago, drowning in toxic derivatives debt. And Geithner’s toxic asset plan is a charade, merely shuffling bad debt between the biggest derivatives holders. So its hard to see how Wells could have turned around so quickly.

And as HousingWire writes:

“We believe that credit quality materially deteriorated in the first quarter, and that Wells Fargo is under-reserving for expected future losses,” FBR’s Miller wrote in a Wednesday research brief. “We reiterate our Underperform rating.”More questions from Miller: “[W]e remain cautious based on what we don’t know. Most importantly, what happened to nonperforming loans and what would have been net charge-offs excluding purchase accounting adjustments? What are the trends in WFC’s Option ARM portfolio? Did the company write up the MSR and what was the new capitalized cost of servicing? Was there any benefit from an increase in level 3 assets given recent accounting guidance?”…

This chart … should speak volumes about the value of skepticism here:

Wells Fargos Turnaround: A Mirage? sg2009040953072

This shows the ratio of loan loss reserves/total loans at the four major U.S. banks still standing. Wells Fargo is in white. Notice anything? You know, like which bank is comparatively weakest on reserving activity against its loan book?

This chart doesn’t include updated Q1 numbers for Wells, as the bank did not provide an updated loan total on Wednesday — meaning it doesn’t include Wachovia. Historically, Wells has justified its lower reserves by maintaining a comparatively higher-quality loan book; can the same argument really be made now? With Wachovia’s option ARMs lurking? Because there’s an ugly truth about credit costs: they come home to roost eventually, irrespective of any games played with loss reserves in the interim.

I wish that Wells’ turnaround was for real. But given that the Fed and Treasury are suppressing the results of the phony stress tests (if you don’t know that they are phony, see this and this), given that mark-to-market has been suspended, given that Wells was one of the banks previously judged insolvent because of its huge derivatives holdings, and given that Wells appears to have very little reserves, I’d be a little skeptical of its amazing turn around.

This article was posted: Friday, April 10, 2009 at 12:08 pm





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