Posted on 09/17/2009 2:50:23 PM PDT by Rebelbase
In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.
Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.
According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large.
Keep in mind, should the junior tranches eventually default, then the bank is on the hook.
Alpert says in reference to how he saw CMBS trades get done, “These guys would say ‘We’ll just take back that silly credit risk you’re worried about.’ Of course that was a nice increase to earnings when they got the security sold. The bank made money at the time.”
When asked if Wells Fargo was prepared to pay out those credit default swaps if these securities default, a spokeswoman told Bank-Impode.com,” In keeping with our strong risk discipline, we continually monitor all of our outstanding derivative positions. We have provided extensive transparent disclosures on our derivatives in our 2008 annual report beginning on page 132.” The real question is, however, was enough disclosed to investors about this practice when Wells purchased Wachovia?
One top hedge fund manager who has experience in outing accounting fraud told Bank-Implode “They needed to estimate that CDS liability upon the purchase of Wachovia. If they didn’t, they’ve committed fraud.”
Since there is no way to track the amount of contracts Wachovia wrote due to the lack of a central clearinghouse for credit default swaps , the next best option for analysts is to examine how the loans that backed the mortgage securities are performing. An in-depth review by Bank-Implode shows significant weakness regardless of Wells Fargo’s recent claim to the Wall Street Journal that the merger integration is on track.
According to the New York Post, Harry Markopolos, the most prominent whistleblower on Bernie Madoff, gave a speech this summer at the Greek Orthodox Church in Southampton predicting more major scandals will soon be revealed about the unregulated, $600 trillion, credit default swap market that Wachovia/Wells is playing in.
One senior member of Wells Fargo’s commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, “One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I’ve just hired five more guys and we can’t keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots.”
Wachovia’s third quarter 2008 filings, which reflect their assets three days before Wells Fargo agreed to the acquisition, shows the bank held a whopping $230 billion in its commercial loan portfolio. Current figures show Wells’ 90-day defaults on its commercial portfolio are rapidly growing. According to data from WLMlab.com which tracks financial numbers that Wells files with its regulators, the bank’s Construction and Development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation’s banks, as of June 30th. Alarming, right?
Wachovia commercial loan officers who spoke to BankImplode say that the bank specialized in underwriting short-term loans up to five years during the credit boom of 2005-2007. The standard terms for such loans included interest-only payments on a floating rate with a huge balloon payment in the final year of the loan. If these loans cannot be refinanced, more waves of defaults are inevitable.
According to Susan Smith, author of a recent PriceWaterhouseCoopers investor survey about the state of the CMBS market, more trouble is brewing. “It’s going to be very difficult for these loans to get refinancing when the market value is going down and fundamentals are deteriorating,” says Smith. According to data from her report, problems in the South Florida region, to which Wachovia had large exposure, are amplified by an increasing overall cap rate (OCR), up 80 basis points from last year, and declining rent prices. (The OCR is the perception of risk investors see. The overall cap rate goes up when the overall risk in the market is up.)
Given the warning signs on the horizon, it’s plausible that Wells Fargo would try to unload some of these troubled loans on the secondary market. But according to multiple private investment shops set up to invest in distressed debt, Wells isn’t selling them. If Wells were to sell the loans, not only would the bank have to book a loss, but would also have to pay out on those pesky credit default swaps.
Instead of selling the loans, sources inside Wells commercial group told BankImplode that they have been instructed to modify loans for customers in default by adjusting the interest rate, but not change the maturity date. Why? According to Meredith Whitney, founder and CEO of Meredith Whiney Advisory Group, Wells is working an accounting game of “extend and pretend.”
“If the bank doesn’t change a maturity date, then it does not have to take an impairment charge on its books, which would affect earnings,” says Whitney. If the loans don’t look like they are impaired, the rating agencies then do not have to downgrade the billions of CMBS that Wachovia sold to other banks and investors. Moody’s backed out of such a downgrade last month, after it previously warned downgrades were coming on $4.1 billion of Wachovia Bank commercial mortgage securities because it now expects principal and interest payments to continue.
Adds Whitney “We’ve seen Wells Fargo play modification games with its own loans. Why wouldn’t they do it with the loans they took on from Wachovia?” On Tuesday on CNBC, Whitney said again “I don’t know if those commercial modifications are going to work.”
In response to analyst expressing doubts that the near $40 billion structured into the purchase of Wachovia for losses in its total portfolio will be enough, CEO John Stumpf spoke out. Stumpf told investors at the Barclays conference this week, Wells Fargo has used $2.2 billion in credits for losses from Wachoiva’s commercial mortgages, or one-fifth of the $10.4 billion in total losses it expects from those loans.
Unfortunately for investors, banks hold CDS liabilities off balance sheet and do not recognize them as a loss until they actually have to pay it. Wachovia at least disclosed in its third quarter 2008 10-K (on note 15) that credit derivatives are a regular part of how they finance commercial activities, and add that such instruments ‘don’t meet the criteria for designation as an accounting hedge’.
Given that a specific number for CDS exposure is not yet tenable, it’s hard to say how many billions are at risk. Yet most market players who follow this bank said when those CMBS de-lever and the derivatives come due, it will be a problem for which Wells is absolutely not adequately capitalized.
To give Wells Fargo credit, it might not even know the size of the problem. BankImplode could not find an analyst who covers the stock to say Wells actually has enough loss reserves built in for it, but regardless the analysts are very concerned about the bank’s health based on the data that they do see. Both Whitney and Paul Miller of FBR Capital Markets both have gone on-air and written in notes to clients that Wells’ loan loss reserves are not enough to handle coming impairments to residential loans. Miller has a recommended stock price of $15 while WFC is currently trading around $29.
So could Wells really have enough capital to handle the liability of credit derivatives that will likely come due within the year? As we watch more and more of the junior tranches of commercial mortgage back securities Wachovia sold become worthless, how will Wells Fargo afford to pay for the risk premiums Wachovia promised they’d cover of if the loans blew up? From all indications, the bank cannot meet these obligations unless it raises more capital, sells good assets for a loss, or puts more of that TARP money to use instead of sending it back to taxpayers, as CEO John Stumpf has promised. So much for “earning our way out” of the financial crisis.
I closed ALL Wells Fargo accounts in the last 45 days. So did some relatives.
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“Since there is no way to track the amount of contracts Wachovia wrote due to the lack of a central clearinghouse for credit default swaps “
It’s not that there is a lack, its just not required by regulation anymore.
parsy, who says REGULATE
an accounting game of “extend and pretend.”
“If the bank doesn’t change a maturity date, then it does not have to take an impairment charge on its books, which would affect earnings,” says Whitney. If the loans don’t look like they are impaired, the rating agencies then do not have to downgrade the billions of CMBS that Wachovia sold to other banks and investors. Moody’s backed out of such a downgrade last month...
Adds Whitney “We’ve seen Wells Fargo play modification games with its own loans. Why wouldn’t they do it with the loans they took on from Wachovia?”
Closing Well Fargo accounts makes no sense. After all, your money is not in that junk, and it is insured, anyway.
It is a fallacy to think that anyone can escape a generally currency collapse. Gold would be a good idea, but what will you do with it? Do you realize that when you sell Gold (say at $10,000/oz), you will owe capital gains tax on your “profits,” even though they will be purely inflationary? The IRS does not index capital gains against inflation. The more inflation, the more they get.
No one escapes a general collapse. Not even farmers! (Remember how they fared in the Great Depression!)
There are many freepers who feel Wall Street did nothing wrong. Every day new stories are coming out just like ACORN stories. Pro Wall Street freepers need to step back and use a little common sense. When 30 trillion is lost last Sept 2008 globally, it is not cause by a few rogue banks and investment firms, it is caused by widespread behavior in the financial centers of the world, US and Britain mainly and to an extend Western EU. Finally many freeper globalist keep expounding how free trade is creating more wealth than those lost jobs lost in manufacturing. Well if the US was rolling in wealth because we found a way to make cheaper sweaters in China, what happen to all that money in the private sector. Why after 20 plus years of NAFTA, WTO and etc, these corporations suddenly have zero in their bank accounts and must come to the taxpayers for a bailout. Maybe the reason why Main Street Americans (shopkeepers, family farmers, small business men) had the right economic model and the Wall Street bankers (globalist, NWO proponents) ahd the wrong economic model. Only problem is Wall Street began this recession with all the lobbyists in Wash DC so they can get Congress to force the American taxpayers to bail corporate America out, but with the beginning of the Second American Revolution (Tea Parties and etc) that will change. Long live the Second Republic in 2010 and 2012!!!!!
This isn’t over.
bookmark
BOOM
Wooo hoo! They're helping reduce the unemployment rate!
It makes sense if you don't like the bank and your getting a crappy return on your money....
I’m in Wachovia which merged with Wells.....I guess I’m going to be getting out very soon
Well Fargo used to be one of the world’s soundest banks just two years ago.They were foolish to buy Wachovia
I thought about that today. With the situation with all these zombie banks, (BoA, Citi, etc.), who in their right mind would continue to maintain their checking and savings accounts there?
I would love to see the stats for the numbers of accounts these banks are losing.
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