Wells Fargo Is Broke: Poor Forecasting Slays Another Giant

The Financial Times is reporting that Wells Fargo (WFC) expects [its] earnings to fill [its stress test] deficit.

Wells Fargo, deemed to need $13.7bn of capital by the US government’s stress test last week, claims to have the earning power to fill its capital deficit by November and apply to repay “as soon as practical” $25bn of government funds.

“We think we already have a lot of capital and, with our earnings, we are accumulating regulatory capital at a very high rate,” said Howard Atkins, chief financial officer.”

…after a good first quarter most banks thought they could earn their way out of the crisis by using rising profits to reduce the need for fresh capital.

[Before I continue, let me remind you of the work I did in “Stressed Out” last week. Briefly, in that piece, I worked through the reasons why the stress test was invalid and utterly useless. I am writing from that assumption so read up on that if you’d like to get up to speed.]

As of Monday, Howard Atkins, Wells Fargo’s CFO says that the bank “thinks it already has a lot of capital.” This statement, in and of itself, is oxymoronic when one considers the stress test assumptions. Mr. Atkins: What does “a lot” mean to you? I’ll tell you what it means to me. “A lot” means Wells does not have enough capital. How do I know this? I know this because the entity that wants to prove Wells has enough capital worse than anyone else, the Federal government, says the bank needs roughly $14 Billion more. I also know this because no bank, including Wells, is likely to repeat their stellar first quarter profits through the remainder of the year to fill any “Gap”. But most importantly I know this because the stress test assumptions were anything but stressful and Wells has proven an inability to forecast in the past.

Flashback...Oct. 3, 2008: Bloomberg reported “Wachovia’s Board Approves Wells Fargo Merger.”

Today's announcement creates one of the strongest financial firms in the world and is great for all Wachovia constituencies: our shareholders, customers, colleagues and communities. This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support. The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth.

Now jump two short weeks forward to Oct. 15, 2008, when the news broke that Wells Fargo’s 3q income was down 25%. At that time Howard Atkins alongside Wells CEO John Stumpf, presented and said the following:

Wells Chief Financial Officer Howard Atkins says the company will go ahead with plans to raise $20 billion in the capital markets, largely through sales of common stock. That is despite an announcement Tuesday that the federal government will invest $25 billion in the bank, buying preferred stock, as part of the federal effort to free up the credit markets.

Wells had announced it would need the $20 billion to shore up its balance sheet when it takes on Wachovia and its large, suspect mortgage portfolio.

Atkins said the $20 billion in capital from the markets and the money from the government would be used to increase business done by Wells. He noted that Wells was one of the few lenders providing credit for existing customers and new customers during the credit crunch.

Move forward with me one final time to January 1^st, 2009 when Bloomberg wrote this:

Wells Fargo & Co.’s $12.7 billion acquisition of Wachovia Corp. faces immediate stress as economists predict home foreclosures will keep rising and some forecast unemployment in 2009 to reach a 26-year high.

Wells Fargo Chief Executive Officer John Stumpf said as recently as Dec. 10 that Wachovia’s $482.4 billion loan portfolio will produce $60 billion in losses over the next three years, with about 60 percent coming from option adjustable-rate mortgages. Wells Fargo, based in San Francisco, is the second- biggest U.S. mortgage lender, behind Bank of America Corp.

Wachovia brings added housing risk in California, home to its Golden West Financial Corp. unit, and Florida, which claims the second-highest foreclosure rate in the country. Unemployment rates in California and Florida were 8.4 percent and 7.3 percent, respectively, in November, compared with 6.7 percent nationwide. Among economists surveyed by Bloomberg, the highest estimate for U.S. unemployment in the third quarter is 9.5 percent, a level not seen since 1983.

“They thought they were anticipating the worst,” said Lykken, referring to Wells Fargo’s loss estimates for Wachovia. “The problem is the worst got a whole lot worse.”

A WHOLE lot worse indeed. From the November figure quoted above, until now, the country’s unemployment rate has risen from 6.7% to 8.9% and doesn’t show signs of falling soon. At the same time foreclosures have not really stopped rising [If you consider the fact that Fannie Mae, Freddie Mac, and Florida all have a moratorium on foreclosures] according to Realty Trac. Lastly, and most important of all, the commercial real estate bubble is popping and very few are willing to see or acknowledge it. Read this “The One Trillion Dollar Commercial Real Estate Time Bomb” and then look at the headlines I’ve laid out below from the past few weeks:

1. General Growth Filed For Bankruptcy
2. Malls Shedding Stores At Record Pace
3. US Office Vacancies Rise to Three Year High
4. China’s Property Prices “Likely to Halve”

On June 8^th, Wells Fargo, along with the rest of the banks who failed the stress test, will present its long term viability plans to the government. On that day they will no doubt continue to state that they will come up with an additional $13.7 billion through earnings. When they say this don’t believe it. Neither Wells, nor the Government, has been able to “anticipate the worst” in the past, and this time around will be no exception.

Comments

[RonB:]

It is sad...no, pathetic, that people like this make up such falsehoods. No one could possible believe all this, so we must write it off to the bleatings of a desparate short-seller who will do anything he can to influence the share price negatively. including spreading lies and false rumors.

May 12 10:00 AM

[BSexposer:]

"You seem to be forgetting the $8.6 billion WFC just raised in an equity offering."

LOL - yet another HACK on Seeking Alpha. What a surprise.

May 12 10:18 AM

[User 412446:]

this is the stupidest report i have seen on wfc.. analyze the company properly.. give buffet a call, why dont u check out his stress test
idiot comment

May 12 10:55 AM

[No one:]

Absolutely ridiculous.

May 12 11:24 AM

[Westcoaster:]

You know nothing of banks earning power and the reserves they have accumulated to handle these losses. The government did a great job at stopping the liquidity problem. Now they need to let the banks go on their own and do their business. Wells has billions and billions of dollars in capital. This money can't be taken by the FDIC.
There loans were done at conservative LTV's and there is collateral against all of this. Do you even know how a bank works? You should go short something else for a while. Shorting should be illegal it is un-American, are you a terrorist?
The craziest thing about this stress test is a strong bank like Wells gets beat up and a NY based bank like Citi walks. This recession has been mostly about NY banks trying to crush their competition. It’s been working ok for them. Watch Senator Schumer create another run on someone like he did to Washington Mutual, that guy should go to jail for the letter he wrote.

May 12 01:54 PM

[Jason Merriam:]

James: I don't know that Wells is "broke", but their earnings quality is certainly questionable. However, I agree with you that rising unemployment could really muck up the works, especially when you consider that California's jobless rate in in double-digits and likely rising.

May 12 01:56 PM

[think befor...:]

You missed the boat on your stress test article as well....You do take a nice picture though.

May 12 05:12 PM

[dcb:]

usual attacks on anyone who questions the government's stress test. Even though the overwhelming evidence say they were a joke. I have stated that the banks and financial firms are starting to pay people to troll sites like seeking alpha. All clearly new members, few comments, etc.
If you think stress tests are real look up Prof Black. I provide this link
tickerforum.org/cgi-ti...

he is a former regulator and was one of the players in the first savings and loan crisis.
As usual the shouters can provide no data for their views.
this has been happening more and more often to anyone who presents a picture that things aren't as rosy the government tells us.

I do not have the name of the person, but it is my understanding that a major bank accounting regulator resigned instead of signing off on the industry data. These things do not happen unless something is very wrong.

May 13 09:15 AM

[dcb:]

I will add that the government will allow the stock market to manipulated until all these folks are solvent. the can't go to congress anymore, and the aig funnel is being looked at too closely now. you see it in reits. When the gov't can't come out and say they are bankrupt or go to congress for the money they will find multiple creative ways to do so. That in summary is what is happening now in every program that is designed to "help the consumer", or "restore markets". TARP, TALF, mortgage relief, FDIC programs. All the same!!! ways to get our money to the banks without us knowing or getting us to actually think our government is helping us. It is the BIG LIE OF OUR GENERATION

May 13 09:21 AM

[doubleguns:]

...big lie of our generation. Also the next and the next and the next generation.

May 13 09:44 AM

[yank:]

West:
Regarding Schumer, you left out his deliberate "sabotage" of IndyMac which directly resulted in a bank panic putting it into bankruptcy. Schumer, Dodd, and Frank are the most morally corrupt, devious politicians I have ever seen. They are "poster childs" for establishing term limits on politicians. Absolute slime.

Yank


On May 12 01:54 PM Westcoaster wrote:

> You know nothing of banks earning power and the reserves they have
> accumulated to handle these losses. The government did a great job
> at stopping the liquidity problem. Now they need to let the banks
> go on their own and do their business. Wells has billions and billions
> of dollars in capital. This money can't be taken by the FDIC.
> There loans were done at conservative LTV's and there is collateral
> against all of this. Do you even know how a bank works? You should
> go short something else for a while. Shorting should be illegal it
> is un-American, are you a terrorist?
> The craziest thing about this stress test is a strong bank like Wells
> gets beat up and a NY based bank like Citi walks. This recession
> has been mostly about NY banks trying to crush their competition.
> It’s been working ok for them. Watch Senator Schumer create another
> run on someone like he did to Washington Mutual, that guy should
> go to jail for the letter he wrote.

May 13 10:18 AM

[wheelbarrel...:]

LOL more proof that the USA is in for a serious decline - now if you short stock or don't agree with the government you must be a terrorist! Priceless.

May 13 11:22 AM

[inflation:]

James - I am reading some of these comments - User 412446 - RonB - No one - think before you write - and a couple of others and I am wondering if they live on our planet? I think your article was pretty much bang on and exactly what has happened so far. Keep up the good work and don't listen to the fools who drink the kool-aid from the cuppeth of CNBC.

May 13 03:06 PM

[Alan von Al...:]

A few notes. Wells is making money on mortgage refi fees, returned check and overdraft fees, card penalties and fees. Big push to serve small business, which I think is succeeding on customer service and solid payment technology. Non-interest bearing deposits are rising (real 'core'), which allows them to do more lending. Huge footprint, no overseas exposure.

May 13 04:55 PM

[wheelbarrel...:]

Sure WFC is in great shape and I'm sure they haven't understated loan portfolio risks either....

Table A. States with unemployment rates significantly differ-
ent from that of the U.S., March 2009, seasonally adjusted
----------------------...
State | Rate(p)
----------------------...
United States (1) ...................| 8.5
|
Arkansas ......................... 6.5
California ......................... 11.2
Colorado ......................... 7.5
Connecticut ......................... 7.5
Delaware ......................... 7.7
District of Columbia ................| 9.8
Florida ......................... 9.7
Hawaii ......................... 7.1
Idaho ......................... 7.0
Indiana ......................... 10.0

May 13 05:56 PM

[wheelbarrel...:]

"FYI 20 year ago i heard the same story that Buffett would go broke because of Wells fargo

Didnt happen and Bill Seideman said that if they had mark to market back in 1988 ALL major banks would have gone broke.

with all due respect,No offense to the author or anyone else but Buffett is MUCH smarter and savvy about banks than anyone reading this "

Sorry - but when Buffet started buying WFC in 1990 wells was earning 600 million per year so I would really like to see where someone suggested that Berkshire Hathaway would "go broke" from buying WFC stock. to say the current "recession" is more severe than the 90's recession would be a gross understatement!

May 13 06:10 PM

[Russ Krull:]

Care to clarify how pointing out that the author ignored the capital raise makes me a hack?


On May 12 10:18 AM BSexposer wrote:

> "You seem to be forgetting the $8.6 billion WFC just raised in an
> equity offering."
>
> LOL - yet another HACK on Seeking Alpha. What a surprise.

May 13 07:25 PM

[ain't no fo...:]

I think WFC ought to spend more effort processing loans than they evidently have spent sending message board assassins to trash a rather well written article that pointed a legitimate questioning finger at their financial condition.

Can't remember when I've seen so many newbies all of a sudden show up in a gang and start a censorship campaign.

Its pretty clear who the REAL terrorists are - westcoaster, User 412446, RonB, No one, think before you write, and a couple of others.

May 13 09:32 PM

[wheelbarrel...:]

Buffett wasn't around during the great depression either so to say that he is right this time is a little premature, especially when you considers Berkshires recent results. He definitely got a better deal than the avg joe with the deals he made!

May 14 01:06 AM

[wheelbarrel...:]

Uh actually you did "He was right once before and I have 100 billion reaasons why he is right again "
And his compensation doesn't lend credence to your argument that WFC is a buy at $20. Past results are past results so he may be right this time but being right in the past does not make it a foregone conclusion.Peace

May 14 02:03 PM