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 (NYSE: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 (NYSE:C), for instance, while Bernstein’s stress-case loss estimate (twice its base-case estimate) is $98 billion. JPMorgan Chase (NYSE: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.