The $37B Roubini Forgot at Wells Fargo

Time magazine, now in the bank stress-testing business itself, reports that according to Nouriel Roubini’s estimate of a cumulative loan loss of 13%, Wells Fargo (WFC) is sitting on additional losses (cover the children’s eyes) of $117 billion in its loan book. Inasmuch as the company has only reserved for $58 billion of that, the $117 billion figures to eat up 60% of the company’s capital. Which means, says Time, that Wells is not one of the most strongly capitalized big banks, as is commonly supposed, but one of the weakest. Or, as the magazine puts it: “Defibrillator. Stat!”

Dr. Doom strikes again! There’s just one problem with his Wells loss estimate, though: he’s bollixed up its calculation. In particular, Roubini apparently neglected (and I’m at a loss to see how he managed to do this) to take into account the $37 billion in marks Wells already took against Wachovia’s loan book when it acquired the company at the start of the year.

How do I know Roubini messed up? First, compare his loss estimates for other big banks with other stress-case loss estimates lately being published, notably by Sanford C. Bernstein. (The Bernstein base stress estimates, by the way, are nobody’s idea of bullish fairy tales; the firm sees huge losses coming for all the big banks.) Yes, Roubini’s estimates are higher for sure—but by only 10% to 20%. He sees cumulative losses of $106 billion at Citigroup (C), for instance, while Bernstein’s stress-case loss estimate (twice its base-case estimate) is $98 billion. JPMorgan Chase (JPM)? Roubini, $97 billion; Bernstein, $80 billion.

But when it comes to Wells, the two sets of estimates aren’t just different by 10% or 20%; they’re miles apart. Against Roubini’s $117 billion estimate, Bernstein’s stress-case number is just . . . $66 billion.

But if you subtract the $37 billion in Wachovia marks Roubini apparently forgot, you’re down to $80 billion, or 20% more than the Bernstein estimate and roughly in line with the gaps between the estimates for the other two banks.

Roubini’s $117 billion loss estimate for Wells is bogus. It’s not that the Doctor has come up with assumptions we don’t agree with. Rather, he messed up his basic arithmetic.

You think I’m quibbling. But this is a guy who has no problem telling the Wall Street Journal that Wells is a “zombie bank,” or helping Time magazine declare that the company is on the verge of being put on life support. Is it too much to ask him to have his numbers straight?

Before Roubini keeps pronouncing Wells a dead bank walking, he ought to address in some more detail how he gets to his $117 billion cumulative loss estimate for the company. And if it turns out that he’s goofed in calculating it, he ought to come out and admit it.

Disclosure: No position in WFC

Comments

[SA Editor J...:]

Fixed, thanks!

Feb 26 12:56 AM

[Eyal:]

With all due respect Tom, over the past 5 years Roubini has been 98% right and you have been 98% wrong. Instead of pointing out Mort Zuckerman and "his" wrong decision, I'd like to see an "I was wrong" article about your stocks, to balance out your Aug 26, 2008 article, titled "Another Reason I'm Bullish on Financials".

Feb 26 12:56 AM

[frcf:]

Another point that Mr. Roubini seems to have forgotten is the banks underlying earnings. The pretax preprovision earnings of banks will offset most of the credit losses. Wells will likely earn $60B in the next 2 years!!!

Feb 26 01:17 AM

[seattleite:]

eh...I read Toms articles just to see when he gets bearish. He has been wrong throughout this downturn. The day he gets bearish or he stops writing because he realizes he is no longer bullish on financials, I will consider that we are near bottom.

Feb 26 01:52 AM

[PeteK:]

Tom, take a vacation to an island some where.
Cool off.

Feb 26 03:06 AM

[User 305589:]

Tom, great to ead something that goes against the mainstream. Roubini had his days and he may be good at the macro level. but he shoudl do himself and the public a favor and stop getting in to the bank analyst business. It#s to me the classic picture of a guy who has made some correct calls and now gets worshipped like an oracle. it#s just a matter of time when his forecasts of gloom and doom will not be confirmed by reality and it may start right now.
sadly, media , ratings agencies and pseudo-jopurnalists are absolutely obsessed these days to bring the most sensational sounding, bearish headline or report. It#s as sickening and as destructive as their perma-bullish cheerleading that most of these media guys did only a couple years ago.
I doubt htough, that Roubini will listen to you. he is likely too busy with all his media appearances to care too much for the correctness of his calls

Feb 26 03:40 AM

[addedupon:]

And where did Meredith Whitney have it wrong when she responded to a CNBC question a few weeks ago: "which bank do you think is most certain to see its share price decline from here"? Whitney's reply: Wells Fargo!

Feb 26 07:53 AM

[Fradulent F...:]

Uh, Tom, if I'm not mistaken you need to read the article again. The WRITER may have it wrong -- but not Nouriel Roubini.

As far as I can see, the writer simply used Dr. Roubini's calculation of a 13% loss and applied it to what he saw on the bank's financial statements. Dr. Roubini didn't make the final calculation; the writer did.

Your point is a good one -- but it appears unfair to use this to whip the good doctor, whom you obviously disdain seriously.

Being sloppy while accusing someone of being sloppy is NOT very attractive, you know....

Feb 26 10:03 AM

[rosebud:]

It boogles the mind how many of the so-called professionals are academics and not business managers. Dr. R is an academic that has liitle insight and management experience to determine how banks operate - how and when the banks books losses. Think about it guys - here is a bank that actually gave up market share a couple years ago for mortgage business to Countrywide becasue it chose to NOT engage in irresponsible lending practices. If you know anything about Wells management is that that have long history in navigating these turbulent waters, has had very conservative lending practices all along and has not done the "investment" banking thing. When is the irresponsible and uninformed media, the missing in action SEC that should be regulating the "shorts", and so called academics going to stop running their mouths and do their homework. Guess what - you do not need to have a PhD to call right that "a mortgage meltdown" would be inevitable -- look around you everyone in America felt entitled to the privilige of owning a home and some irresponsible lax enterprises like Wamu and Countrywide are partly to blame for allowing this entitlement. The investment banks that packaged this toxic waste in the interest of boosting yield are just to blame. Guess what renting vs owing is not a bad thing! Wells will survive just fine - shame on the media and academics for tarnishing one of the best corporate citizens in the US.

Tom - thanks for calling this out - you are a very respected professional in the industry! frcf - thanks for connecting the dots

On Feb 26 12:56 AM SA Editor Judy Weil wrote:

> Fixed, thanks!

Feb 26 01:11 PM

[Charlie Bottle:]

You are preciselly wrong.

Feb 27 01:13 AM

[Nouriel Rou...:]

Sir, your attack it totally misplaced. I never made any prediction about credit losses in individual US banks. I only used macro variable to forecast average losses on tranches of different types of loans and securities for the AGGREGATE of US banks; this is the same approach used by the IMF and Goldman Sachs to derive estimate of aggregate expected credit losses for all US banks, not for individual institutions. It was Time magazine that used my macro estimates of average losses to then make inferences and estimates about individual US banks. When you go to the individual bank level you of course need to take into account individual banks's provisioning and other details to infer capital losses. So you may or may not be right about what is happening at Well Fargo; but the comments you make have NOTHING to do with what I have written. So you should correct the record on this. I never wrote that Well Fargo has an additional $117 billion of losses. I have provided an estimate of aggregate credit losses for all US financial institutions based on standard estimated of average losses from macro assumptions.

Feb 27 01:14 AM

[Vox Rationalis:]

Brown has totally missed reality here - the blame for the error lies with Time, not with Roubini. Here's the pertinent parts of the article:

"We relied on the loan-loss estimates of New York University professor Nouriel Roubini, a.k.a. Dr. Doom, who has been sagelike in his predictions about the credit crisis so far...

"Home buyers owe [Wells Fargo] $360 billion, up from about $150 billion just three months ago. Next, Wells has $154 billion in commercial real estate loans, as well as $200 billion in other types of commercial debt. Apply Roubini's overall 13% loss projection, and the conclusion is that Wells may be sitting on a $117 billion loss."

Roubini's not even quoted in the article. It is quite clear that any error here is not his.

Feb 27 09:54 AM

[User 366535:]

You sound like the kind of person who works at one of the rating agencies. You are looking so hard through your wallet at the details that reality is blurred by your focus.

Feb 28 06:45 PM

[Ricard:]

Is this really Roubini commenting?


On Feb 27 01:14 AM NRoubini wrote:

> Sir, your attack it totally misplaced. I never made any prediction
> about credit losses in individual US banks. I only used macro variable
> to forecast average losses on tranches of different types of loans
> and securities for the AGGREGATE of US banks; this is the same approach
> used by the IMF and Goldman Sachs to derive estimate of aggregate
> expected credit losses for all US banks, not for individual institutions.
> It was Time magazine that used my macro estimates of average losses
> to then make inferences and estimates about individual US banks.
> When you go to the individual bank level you of course need to take
> into account individual banks's provisioning and other details to
> infer capital losses. So you may or may not be right about what is
> happening at Well Fargo; but the comments you make have NOTHING to
> do with what I have written. So you should correct the record on
> this. I never wrote that Well Fargo has an additional $117 billion
> of losses. I have provided an estimate of aggregate credit losses
> for all US financial institutions based on standard estimated of
> average losses from macro assumptions.

Mar 01 02:30 PM