Beware of Bank Earnings Propaganda - They're Still In Big Trouble 7 comments
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If one were to parse the bullshit that the government has allowed the banks to proffer in the name of earngings, one would find the banks probably flailing this quarter from bad loans and mortgages. Beware of the FASB authorized accounting games and peer beneath the hood.
I have included a portion of the professional level Wells Fargo analysis (click this link to subscribe) to help drive my point home, but before you peruse it as a non-subscriber, be sure to remember how this research subject twisted and manipulted their numbers to produce a bank profit out of a bank loss (Tricky Dick Bank Reporting Schemes - what record earnings are you referring to?) then take a look at the hard data released by the FDIC and the NY Fed: Revised SCAP Assumptions Public Open Source Version 1.1 2009-05-18 15:15:47 1.21 Mb) as well as an explanation as to how I tabulated it.
Wells Fargo
Wells Fargo (WFC) acquired home equity loans from Wachovia, which carries the highest default risk as its portfolio largely comprises second lien mortgages. The value of the home equity portfolio is US$128.9 billion.
Home equity portfolio | US$ mn |
Core portfolio | |
California | 31,784 |
Florida | 12,067 |
New Jersey | 8,086 |
Virginia | 5,653 |
Pennsylvania | 5,129 |
Other | 56,342 |
Total core portfolio | 119,061 |
Liquidating Portfolio | |
California | 3,835 |
Florida | 492 |
Arizona | 233 |
Texas | 179 |
Minnesota | 122 |
Other | 5,001 |
Total liquidating portfolio | 9,862 |
Total core and liquidating portfolios | 128,923 |
The value of Wells Fargo’s pick-a-pay portfolio (home loans) is US$93.2 billion, of which US$39.7 billion or 42.6% is impaired loans. The principal balance of the impaired loans is US$61.6 billion. This loan has the highest probability of risk and could result in a complete writedown. Currently, the LTV in the majority of the states is above 100%, with California and Arizona having the highest – 161% and 152%, respectively. Despite writing down US$21.9 billion, the carrying value at these two states hovered around 100%, implying high risk.
Pick-a-pay-portfolio | Impaired loans | |||
Unpaid principal balance | Current LTV % | Carrying value | Carrying value to current value | |
California | 42,216 | 152.0% | 26,907 | 98.0% |
Florida | 6,260 | 129.0% | 3,779 | 79.0% |
New Jersey | 1,750 | 101.0% | 1,271 | 74.0% |
Texas | 475 | 76.0% | 336 | 54.0% |
Arizona | 1,642 | 161.0% | 987 | 99.0% |
Other states | 9,306 | 110.0% | 6,397 | 77.0% |
Total | 61,649 | 39,677 | ||
Methodology to compute loan loss rate: Real estate 1−4 family junior lien mortgage
Real estate 1−4 family junior lien mortgage comprises home equity line of credit (HELOC) and second/junior lien mortgages. Home equity carries a very high risk of default due to high LTV and being a second lien mortgage. We segregated the loans into owner occupied and non-owner occupied based on the state-wise proportion published by FDIC. Thereafter, applying the respective default rate of each category, we arrived at the weighted average default rate.
To determine net charge-offs, we have considered the recovery rate based on historical recovery rates applied in conjunction with the current LTV. The table below gives the recovery rates used to determine net charge-offs.
Current LTV | Recovery rate | Basis | |
Greater than | 120% | 12.0% | (recovery rates during 1990-1991, lowest since 1976) |
Greater than | 110% | 16.7% | |
Greater than | 100% | 21.4% | (average recovery rate since 1976) |
Greater than | 90% | 28.2% | |
Less than | <90% | 35.0% | (highest recovery rate since 1976) |
Source: FDIC and Boombustblog.com Analysis
We estimated the current LTV for home equity loans based on the housing price decline calculated using the Case-Shiller Index of each state and LTV at origination to determine the current LTV. Impaired loans have a two-year loss rate of 67.5%, while other loans have a loss rate of 56.4%. We have assumed impaired loans to have a 0% recovery rate in each of the states. The non-impaired home equity loans would have a loss rate of 56.4% for 2009 and 2010, while the Federal Reserve’s estimated loss rate is 21–28% for the same period.
Real estate 1−4 family junior lien mortgage | High Risk Subprime ARM Loans (Low FICO and high LTV) | |||||
Current LTV | Owner Occupied | Non- Owner Occupied | Default rate | Recovery Rate | Loss Rate | |
Impaired Loans | 65.0% | 95.0% | ||||
California | 128% | 93.7% | 6.3% | 66.9% | 0% | 66.9% |
Florida | 124% | 88.7% | 11.3% | 68.4% | 0% | 68.4% |
New Jersey | 108% | 91.5% | 8.5% | 67.6% | 0% | 67.6% |
Arizona | 146% | 91.9% | 8.1% | 67.4% | 0% | 67.4% |
Other | 112% | 91.0% | 9.0% | 67.7% | 0% | 67.7% |
Total Impaired Loans | 67.5% | |||||
All other loans: | ||||||
California | 128% | 93.7% | 6.3% | 66.9% | 12% | 58.9% |
Florida | 124% | 88.7% | 11.3% | 68.4% | 12% | 60.2% |
New Jersey | 108% | 91.5% | 8.5% | 67.6% | 21% | 53.1% |
Virginia | 111% | 91.1% | 8.9% | 67.7% | 17% | 56.4% |
New York | 90% | 92.0% | 8.0% | 67.4% | 28% | 48.4% |
Pennsylvania | 111% | 90.0% | 10.0% | 68.0% | 17% | 56.6% |
North Carolina | 86% | 88.3% | 11.7% | 68.5% | 35% | 44.5% |
Texas | 89% | 91.6% | 8.4% | 67.5% | 35% | 43.9% |
Georgia | 105% | 88.5% | 11.5% | 68.5% | 21% | 53.8% |
Arizona | 146% | 91.9% | 8.1% | 67.4% | 12% | 59.3% |
Other | 112% | 91.0% | 9.0% | 67.7% | 17% | 56.4% |
Home equity portfolio | 56.4% | |||||
As a reminder...
- America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario
- Warning: "What you don't report in your balance sheet can screw the average investor".
Disclosure: I own bearish positions on WFC and all companies that I am bearish on, obviously.
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This article has 7 comments:
Me too.
I don't do the micro analysis that you have done, but my macro view is similar. I see the accounting tricks being played by the banks (uber banks especially) boosting earnings dramatically for a couple of quarters at the expense of reduced future earnings, which will be reduced when the birds being artificially puffed up today come home to roost. The fourth quarter (2008) losses that resulted from mark-to-market accounting have been added back in the first quarter (2009) through balance sheet adjustments under accounting rule relaxation in March. These deferred losses will be realized in the future under any but the rosiest of scenarios.
They can go to zero, if they are second lien, which is a premise here.
They are unsecured loans if there is no collateral to back them up. Any 2nd lien mortgage on a property with an LTV over 93% (in the case of an REO) of over 99% in a straight sale (optimistic) is effectively unsecured (remember, it takes roughly 7% in expenses to maintain and or liquidate a property - brokerage commissions, municipal fines, maintenance and upkeep, foreclosure costs and legal expenses).
Don't fret, my team and I do a pretty thorough job when it comes to analysis.
I'm all about the numbers, and what the numbers mean, but I shy from such investments as they seem to be more about political will and tax-money tunneling than actual finance.