In this day & age of routine deception, it’s helpful to get articles like the one below – which takes exception to Wells Fargo’s presentation of it’s own financial health.
Wells Fargo revisited: A Case of Unmistaken Fraud
by Dave Krantzler
In response to an equity analyst who issued a report today stating that WFC may need $50 billion to repay $25 billion in TARP plus cover another $25 billion in further asset losses, I decided to update my own analysis of WFC using its recently filed annual report. What I found was quite stunning. Using conservative estimates of the collateral underlying WFC’s loan assets, and the corresponding write-downs and liquidity needs which result from the deterioration of these assets, I calculate that WFC will be forced to incur at least $283 billion in future asset write-downs and will thus require at least that much in capital to service the corresponding liabilities. Furthermore, it is easy to conclude based on my analysis that the CEO of Wells Fargo has Friday has fraudulently conveyed the financial position of the bank he runs.
Let’s look at some numbers. WFC’s on-balance-sheet loan assets are as follows:
Commercial Real Estate
Commercial loans $202 Billion
Other Commercial loans 103
Total Commercial $356 Billion
Consumer Real Estate
1st mortgages $247.8 Billion
2nd lien/home equity 110
Credit card 23
Other (autos,student etc) 93
Total Consumer Loans $473.8 Billion
Other 34.2 Billion
Total Loan Assets $864 Billion
The melt-down in commercial real estate is just starting to hit the banks. Let’s assume Wells only suffers a 20% hit the value of its loans in this area. That’s $71.2 billion in write-downs and liquidity needs. I can tell you with near-certainty that anything under construction right now is probably next to worthless, so my estimate on the overall commercial portfolio is probably conservative.
How about the residential portfolio. Given the substantial and ongoing decline in housing values, it’s probably safe to assume that home equity loans have no value, and several respected real estate analysts have stated that is the case. But let’s say WFC’s home equity portfolio is worth 50 cents. That’s $55 billion in write-downs and cash needs.
Let’s give them 80 cents on the 1st mortgages. This too is generous, as the pay-option ARM portfolio that WFC inherited from Wachovia is already marked down to 80 cents, represents 48% of WFC’s 1st lien mortgages, and will soon be going thru its massive rate-adjustment phase which will entail a high percentage of defaults and foreclosures. Recent blocks of foreclosed bank properties in California and Florida (where the majority of WFC’s pay-option ARM mortgages originate) have been trading at less than 50% of original value. So 80 cents is a conservative assumption and would result in another $49.4 billion in write-downs and cash needs.
Off-balance-sheet: WFC’s Junk In The Trunk
OFF BALANCE SHEET exposure consists of 33.3 Billion of QSPE (qualified special purpose entities), with maximum loss exposure of $39.6 Billion.
QSPE’s are essentially the mortgage securitization trusts into which Wells Fargo dumped its mortgage securitizations, leaving WFC with up to $40 billion of liability exposure, but FASB accounting rules allow Wells Fargo to leave this exposure off of its balance sheet.
They also have $40.3 billion of carrying value in VIE’s (Variable Interest Entities) with a maximum loss exposure of $65.3 billion. VIE is the formal name for the accumulated CDO’s, CLO’s and other asset-backed structures which FASB allows WFC to classify as off-balance-sheet.
It specifically says in financial statement footnotes that WFC engages in various derivative trades such as credit default swaps and other derivative structures in connection with its off-balance-sheet assets.
Let’s discuss this off-balance-sheet exposure. VIE’s typically require the “sponsor,” in this case WFC, to provide a certain level of loan guarantees to the entity. As per various sources of reporting, we know that the market values the types of assets WFC carries off-balance-sheet anywhere from zero to 30 cents. These are the assets typically referred to as “toxic.” Let’s assume Wells eventually has to write-off 50% of its exposure here (I believe that to be conservative). That entails taking a $40 billion write-down and coming up with a like-amount of cash to pay off the entities holding the loans against those assets.
WFC also discloses on-balance-sheet exposure to credit default swap derivatives of $20.8 billion. In a note to this disclosure, they reveal the total off-balance-sheet exposure to credit default swaps is $56-137 billion. Again, let’s assume the eventual economic loss from CDS exposure is 50 cents on the dollar. That would entail WFC taking $68 billion write-down and having to come up with $68 billion to pay its counterparties.
In using what I would argue is conservative assumptions to assessing WFC’s off-balance-sheet problems, I come up with $108 billion in future write-downs and a corresponding liquidity need of $108 billion to service this exposure.
To summarize, I have detailed the following probable future write-down requirements for Wells Fargo, and have shown that these values are quite conservative:
Commercial loans $71 billion
Residential mtgs 104.4 billion
derivatives 108 billion
Total $283.4 billion
I’m not sure how the analyst from Keefe, Bruyette & Woods arrived at his $50 billion number for WFC, but I think my analysis shows that realistically, and with conservative mark to market assumptions, that WFC is insolvent without massive amounts of Government bailout money coming. That’s the optimistic viewpoint. A more realistic viewpoint is that the CEO of Well Fargo committed serious fraud in the numbers he reported to the market last Friday.
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