Roubini's Wacky Wells Loss Estimate: It's Not Just Academic

Commenting on our piece yesterday that pointed out that Nouriel Roubini botched his arithmetic in tallying Wells Fargo’s expected cumulative loan losses, reader T e-mails, and provides a succinct summary of conventional wisdom among the bears:

The main points of this discussion are that WFC’s ultimate charge-offs cannot be predicted with a high level of confidence. Dr R’s estimate is within the realm of possibility, whether his math was correct or not.

It is also interesting to note that it does not wipe out Wells, but certainly will require some dilutive capital raising.

Dr. R is also correct, as we pointed out, that WFC is no longer a super well capitalized [bank] after doubling assets in this acquisition.

So whether Roubini screwed up the math or not, his number is nonetheless “within the realm of possibility” since the future is unknowable. Anything could happen! That’s true, I suppose. But only in the most profoundly trivial way: the Roubini’s loss estimate is possible because anything’s possible. Rigorous!

If Roubini had come up with his bogus number as a purely academic exercise, to be debated among his colleagues down at NYU, I’d have no argument with T’s point, or any problem with what he has to say. I’ve certainly made my share of dumb mistakes putting together loss models.

But Roubini’s not just chin-pulling with other eggheads. Instead, he’s traipsing from media outlet to media outlet telling anyone who’ll listen that Wells Fargo—a federally guaranteed financial institution that you, dear taxpayer, would be on the hook for if Roubini’s rantings ever became a self-fulfilling prophecy—will shortly be on the verge of collapse. “Zombie” is his preferred term of art.

And now we see he has no basis to make that claim. He screwed up his math! And the best his defenders can come up with to support him is the anything-might-happen argument, above.

Sorry, not good enough. Roubini needs to a) pipe down about Wells, and b) fix his model pronto. He might also c) go back to the Journal and Time and all those other places and tell them he was wrong in the first place. But I somehow doubt that last is going to happen.

Disclosure: No position in WFC

Comments

[fatcat:]

Think Mr. Brown needs to go back and read his own articles for the last year and a half....he was wrong all the time about the banks.


Careful about casting stones....

Feb 27 06:57 AM

[Tom Armistead:]

Dr. Doom should be muzzled. WFC's status will become clear in the wake of stress testing, and any capital needed will be available under CAP on a contingent basis at a price 10% below the 20 day trailing average as of 2/9/09.

Feb 27 07:32 AM

[Pj568:]

Whether Roubini is right or not (and he has been for the last two years while Brown has been wrong), it seems like a hedge fund manager should be figuring out a strategy to profit from what is being said instead of arguing math.

Feb 27 07:51 AM

[Fradulent F...:]

I'm going to say again what I said yesterday: Dr. Roubini did NOT make this calculation! If you cant' read the article on which you base your allegations, then you've got ZERO credibility.

The author of the article simply took Dr. Roubini's rough-cut estimates on likely loan losses -- and personally applied them to the individual banks. I don't see evidence in the Time article that Dr. Roubini directly participated in this process.

If anything, his estimates are low, base don what's happening to portfolios like Alt A and jumbo loans right now.

At first, I thought your oversight was just a mistake, Tom. Now I think it's disgraceful. If you can't bother to get your own facts right, why should anyone believe what you write?

Feb 27 08:18 AM

[User 305589:]

I think, the public, the society as a whole would be way better up, if all the talking heads - and that includes a whole range of politicians, academics, journalists and so called professional money managers - simply shut up about anything that is outside their very own circle of competence. what a quiet, peaceful and less hysterical world that would be!

I have a dream...

Feb 27 08:34 AM

[atavist.avatar:]

I guess the question really is can Mr. Brown's conclusion be correct after what, apparently, is a history of poor forecasts. This should not be confused however with his logical demonstration that the Roubini analysis is flawed.

Feb 27 09:23 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 09:53 AM

[walters:]

Tom- tell the truth. Were you ever tuitored on how to misrepresent facts by Dick Cheney?

Feb 27 11:19 AM

[Douglass:]

People should go back and read Atlas Shrugged...specificall... the hatchet job delivered by the State Science Institute against Rearder Metal.

Feb 27 11:50 AM

[greencheese:]

I can not agree with you more on your statements. Mr. Brown has been a bull since September 2007 using unsubstantiaged claims and numbers. He's been wrong period. Roubini has been right most of the time. I have not seen any true creditable analyst or economist dear to argue with Roubini since most of the time they would say "I agree." Why? Roubini has been right most of the time.


On Feb 27 06:57 AM fatcat wrote:

> Think Mr. Brown needs to go back and read his own articles for the
> last year and a half....he was wrong all the time about the banks.
>
>
>
> Careful about casting stones....

Feb 27 02:50 PM

[rugape:]

I think Tom should be taking on Time Magazine, not Roubini. The article is written in a way to imply Roubini's credibility to Time's flawed application of logic (or illogic). It's clearly confused and misdirected a great number of people and the WFC shareholders will surely pay, at least in the short term, for such a slip of the tongue. I'd like to know why Time feels so strongly to attack one of the few strong banks trying hard to do the right things in this market, such as cancelling their employee award trip, Wachovia sponsorship of a PGA tournament and suspension of Executive Bonuses. As a matter of fact, I am a proud shareholder and while I have more than a decade before my retirement, there are thousands of people in this country that count on the dividends for their livelihood. So while I have a great deal of respect for JP Morgan Chase, I think its shameful for them to slash their dividend and continue to pay bonuses. Can we get Time to write an article about their future losses?

Feb 27 03:19 PM

[downtoearth:]

the Time article was fun, mostly tabloid in its nature - as most of these type of articles are. Wells Fargo has a history of being considerably conservative with it's loan origination programs; that's why, in the third quarter (2008), when all of the other larger financial institutions were struggling or suffering, Wells reported an surprising and unexpected profit. However, where acquisition of Wachovia and all of its branches (mostly in the east and southwest) gives Wells a greater and geographically "coast to coast" presence, it does remain to be seen to what extent the Wachovia loan portfolio impacts Wells financial picture going forward. Chase made the same move by picking-up Bair's seizure and "flip" of WaMu - its branches, deposits, and its loans as well. Chase now too has the same "coast-to-coast" presence as a result of that acquisition, and they too are now beginning to feel the presssure of the WaMu loan portfolio they acquired.

Bottom line: It's tough business "guessing" what will happen to these banks - there are simply too many variables involved: how many more folks will become unemployed and not be able to pay their mortgages?; which banks will be the unlucky ones to have their loans impacted by the next "wave" of the unemployed?; to what extent will small or midcap (however we could define that now) or "mom 'n' pop" businesses with now weaker income statements be able to convince banks to extend new or replacement loans or lines of credit?; and if the bnaks do not lend for this reason, will their only income be limited to existing potentially risky or problem loans?; and when the stock prices of the banks reach certain low single digits will Moody's or S&P significantly reduce their credit status to "junk", like they did with WaMu, and thereby create an identical "run" on the deposits such as that which caused WaMu's Tier 1 melt-down and eventual seizure?; etc. ad infinitim, ad nauseum.

You can argue both sides, all aspects - endlessly. And each day brings a new piece of information which just adds to the quagmire analyses.

In the end I believe that all of these larger banks are "too big to fail" and that the federal government will continue to "prop them up" as needed; not that such will, in the long run count for much, as I see in all of this a much larger threat to the dollar and the basis of value in this country.

There is no doubt that we can continue to paint and reconstruct and refurbish and argue about the various structural aspects of those deck chairs...... In the end, Roubini may be right, if for no other reason, because he seems to be focused on the iceberg.

Feb 27 03:50 PM

[EMS:]

So you are not long WFC ?? Doubt this highly. You are a punk, Tom.

Feb 28 05:21 PM

[Mad Hedge F...:]

P OI c There is some fascinating action going on the options market right now. There is some massive buying of short dated puts in Wells Fargo (WFC) and JP Morgan (JPM), while buying of longer dated puts has weirdly almost vaporized. These are the only two high priced big bank stocks left. It is not happening in Citibank (C) or Bank of America (BAC) where there is so little meat left on the bone that buyers don’t want to feel like they are the last man at an all you can eat buffet. Brace yourself. This is good news. It means that traders expect to see some short term volatility in these names. After that Obama’s bank bailout, stimulus program, and new budget will start to kick in and come to the rescue of the sector. Call me the “options whisperer.” I stroke these things, and they speak to me.

Feb 28 10:12 PM

[Stone Fox C...:]

Keep up the good work. Everybody wants to act like Roubini is the sage of all times and won't ever be wrong. Has he had a history of predicting accurately or is this just a one time deal?

Mar 01 11:20 PM

[Tom Armistead:]

I wonder what Roubini thinks about WFC's pre-announcement of an excellent 1st quarter?

There is a possibility that the man is less than infallible...

Does he realize it?

Apr 12 04:20 PM