Wednesday, July 16, 2008

Wells Fargo: Not so wounded as we were led to believe

I had been thinking we'd get a post-bank earnings rally, and Wells Fargo's not-so-bad earnings report got me off on the right foot. CDS on WFC fell 25bps, with other banks 10ish tighter.

Now this is mostly short-covering, I'm sure. You have Wells Fargo, the most staid bank in the country, rallying 30% in a single day. Only panicky shorts can cause such a sudden shift in a name like Wells. Hell, the whole S&P Financials sector is up over 10%.

If you need further proof that its a short-covering rally, consider the alternative. Investors are pouring into financial shares because they suddenly have confidence in the banking system.

Now just because its a short-covering rally doesn't mean it couldn't mark a Bottom (tm). This bear market isn't going to end with investors suddenly having confidence in financials. It will end when shorting financials doesn't seem like an easy trade any more. And no, Mr. Cox, it isn't the short-sellers fault. Short interest is so high because there is a lot of stuff worth shorting. So you can't get a bull market in anything until the shorts get out of the way.

So is it a Bottom (tm)? Who knows. My view is that we'll bottom when it is viewed that the big banks and brokers don't need more capital. I think it will take at least another quarter of earnings reports for the market to get that kind of confidence. Obviously oil and monetary policy could get in the way as well.

Anyway, we'll see how J.P. Morgan and Merrill Lynch come out tomorrow. I expect a good market reaction either way after J.P Morgan's numbers. Merrill is more risky. Continue to be short duration.


Tom said...

I think market is going to be surprised by bank earnings this quarter, not amongst the money centers, but by small community banks. There were, and still are, a lot of very smart and conservative folks running the mom-and-pops, who kept clear of this mess by sticking to vanilla banking. The earnings from the community banks will be what restores faith in financials.

Now if we could just get Bernake to stop expanding the money supply.

cap vandal said...

This is big enough and deep enough that people need to see that the strongest players can earn their way out of problems. We are going to see credit losses for quite a while, but the first sign would be some write ups on mark to market stuff.

I think people are figuring that Wells and their ilk can keep posting big credit losses forever without raising capital as long as they are below earnings.

Wells can also take their pick of the weaker banks in a consolidation. All bets are off in a total meltdown.

We all know that housing hasn't bottomed, but I was just thinking that maybe the current conforming loans being made today will be made on houses that never sell for less. That is, all that REO -- people buying that stuff may not be buying at a bottom, but real estate isn't fungible and liquid so there is no reason that a conforming loan made today might not be within historic loss rates. Ergo, F&F maybe can earn their way out of this.

A lot of people aren't that keen on F&F tanking, so they will get every judgment call on the way down -- that is, if they can make it, they won't be taken down on a technicality. Over a few years, they could offset huge losses on their 05-07 vintages.

You are going to have the shorts coming up with charts showing how they are insolvent today under plausible assumptions, but these guys aren't the monolines. For what it's worth, the monolines haven't blown up anything but their equity. Yet.

Aren't markets fun.

spock said...

Wow you do Star Trek too! Full service.

Unknown said...
real bottom is when these buggerers get kicked in the ar$e

JoshK said...

I think that this is very temporary short-covering rally. No one on the street is 100% sure how much stock will be available and for what price. Once the dust settles, watch out. People will be back in that trade. I think LEH is starting to look like the next big bust.

Superbear said...

Quarter? Make it at least a couple of years.

Accrued Interest said...

I think in order to argue that the banking crisis persists for years, you have to assume something bad happens that isn't happening right now. I say this because bad home loans will burn out. That's a fact.

Now it isn't ridiculous to make the assumption that more badness will come. Totally reasonable. But you can't assume an acceleration of foreclosures to infinity. Just can't happen.

Anonymous said...

I guess nobody has pointed out that WFC changed some accounting rules. To recognize defaults from 120+ days to 180+ days. I don't know how much of it affected the bottom line. I don't trust the results.

Unknown said...

my bets: 1)lehman stays put in short and long run
2)gsachs gets beaten a bit..not kaput though
3)ubs..u n us....thats in friggin pain
read being buggered

UBS Auction-Rate Buy Leaves Some Investors Out in Cold
StockJockey's avatar
by StockJockey
Thursday, July 17, 2008

The hits just keep coming for the private client division of UBS. Things are so bad the Joe Grano, the former bigshot at PaineWebber, would probably not be interested in participating in a buyout of the franchise, should UBS seek to sell it for a song.

The tax scandal is bad enough, but over 15 class action lawsuits are being brought on behalf of UBS clients. UBS announced everyone would be made whole, but it is not proving to be that simple:

UBS AG, Switzerland’s largest bank, plans to buy back as much as $3.5 billion of auction-rate preferred shares after being sued in the U.S. for fraudulently selling the securities as low-risk alternatives to cash.

Clients holding the securities in UBS accounts will be able to get their money back in full, the Zurich-based company said yesterday. The offer, the first by a broker, applies to shares issued by tax-exempt closed-end funds managed by firms such as BlackRock Inc. and Nuveen Investments Inc. It doesn’t include auction-rate debt from municipalities or student-loan providers.

Unknown said...

Its like a big bro..a whole gang of senior "BOILER ROOMS" only now its not the JT MARLINS but the jp morgans (here..the ubs's)

An old friend of mine was caught up in the machinations at UBS. After saving diligently for over 10 years she had finally accumulated a quarter million dollars to be used as a down payment for a house in Southern California.

A UBS rep got her to move her money from her longtime Washington Mutual branch a a year ago; but ultimately she had little contact with the asset gathering broker. He invested the funds in auction rate securities, telling her they were as good as cash, even as she explained that she was house hunting and would need to access the funds.

Several months later she submitted an offer an a house, and tried to pull a chunk of the money out to make the deposit and down payment. Only at this time was she told what had happened, and UBS offered to given her a loan against the securities, but was less than forthright about the economics.

She passed on the offer and walked away from the house; too bad considering she was well qualified and ready to buy from a motivated seller. The housing market is getting hit from a perfect storm.

I called her yesterday to email her a link to the story in Bloomberg. Since she had no debt from municipalities or student loans we thought she could see the light at the end of the tunnel.

Unfortunately question marks remain, given the email I just received back from her:

i was just told that they are only buying back the non tax ones since only 75% of them have paid out. apparently it’s a lottery that the companies like the ones i own, ING, DNP and cohen & steers are cashing out by cusip number. i now have to call each company and bitch--are they really “randomly” selecting cusip numbers or cashing out people they know and call to bitch!!

Viktoria said...


here is the link to the report explaining the redemption process. You can pass it on to your friend. Hope, it help.

By no means I'm covering UBS, I'm just wondering how can someone saving for 10 years be so out of touch with those hard-earned $$$? Isn't it a good idea to read wikipedia or something [before investing $250,000] where it mentions liquidity risk? Do people ever accept responsibility? even for their own money?

Unsympathetic said...

AI, bad home loans will not burn out - that's a fact.

Here is the pdf from Ivy Zelman and coworkers that I recommend you brush up on.

Subprime is only the first wave of the tsunami. The Alt-A wave hasn't come inland yet.. not to mention commercial loans, which will swamp the regional banks.

Accrued Interest said...


The 2005-2007 vintage loans have to burn out. That's a fact. Losses can't go to more than 100%!

Now, you can argue that its the first wave of problems. That's a reasonable argument. You can also argue that losses from 2005-2007 will be much greater than they are now before they eventually burnout. But they will burn out.

cap vandal said...

Re: Wells Accounting.

Yea, it sort of sucked. A more disciplined balance sheet would have missed earnings estimates.

However, that is a real forrest/tree situation. They make a shit load of money on fees and spreads, so as long as they book loan losses lower then their earnings, they don't have to raise capital. They don't dillute existing shareholders. They don't have to cut dividends.

Their accountants are on board also. So they still have some leverage there.

As long as they can earn $X, write down $X minus something , and the difference is less then the dividend, their capital increases.

Personally, I have a huge issue with their treatment of MSR accrual, since I can't see how that could be considered worth MORE when they must need to spend more to service all the problems. However, they seem to be able to do it.

12 months ago, C was still trying to HIT EARNINGS and management was going to try to squeak by and get their 07 bonuses. Hard to believe.

Now, everything is priced based on survival prospects. Beating earning (regardless of how) and raising the dividend (regardless of prudence) is a signal that they are gonna survive. If it takes a little edgy accounting to get the earnings up a few cents, so be it.

cap vandal said...

From my past experiences in business, a lot of the write downs are done backwards. They have a general idea what they need to book (a lot / more then they ever could in a quarter), they figure out what they can afford without blowing up, and thats that is the number they hit. There may be a pretty wide range of what they need, so there is enough room in the accruals to get where they need to be.

Specifically, I am thinking of Merrill. They sold Bloomberg for $5 billion, they book $5 billion in net, after tax losses, which comes out to the $9 or so that they wrote down. Current management is new (for the next couple of quarters) and really wants to write down the hell out of everything. They will do it to the extent that it doesn't totally blow them up.

Capital is extremely expensive right now and that is driving accounting. Overall, accounting is better then in the past (believe it or not), since the auditors are in a stronger position and absolutely aren't going to take another bullet for a client after Enron, etc. Not to say that it is pristine or anything. But they also know that if/when a firm blows up, everyone will be looking at them.

cap vandal said...


As far as auction rates ---

Closed in funds. Not a problem except for timing.

Munis. All over the place.

Student Loans. Some people are going to get seriously fucked.

If your friend had CEF auction rates, they are still good credits and she will get her money back. It is even possible that she will be able to buy property cheaper. Luck counts for a lot. If they are CEF's and she really wants cash now, I don't see why not borrow, as UBS seems to have a decent program.

Student loan ARS's -- I another (bad) story.

yoyodyne said...

Aside from changing 'delinquent' from 120 to 180 days, they booked a gain on mortgage servicing due to Slower prepayments. LOL!

Anonymous said...

Mortgage servicing is an money losing business. With foreclosures rising, they would have to do servicer advances to these MBS/ABS deals. It is a negative carry. They could lose a ton of money.

I have to see how they got gain!!!.

Accrued Interest said...

Now I agree that servicing 2005-2007 loans will be a money losing business, but slower prepays does make servicing more profitable, all else being equal. See, a servicer basically has an interest-only position in the MBS portfolio. So as prepayments come in slower, they get more interest. That would of course be offset by defaulting mortgages. But that's why they claimed a gain. Nothing more magical than that.

yoyodyne said...


We certainly understand the accounting of the 'IO' features of slower prepayment.

The fact is, that projected acct'g 'gain' is going to be swamped by non-payers and bankruptcies.

I don't think anyone said anything about magic. We are pointing out that a Pyrrhic victory is no victory at all.

"If we are victorious in one more battle with the Romans, we shall be utterly ruined." ~ King of Epirus