Wells' 'Under the Radar' Subprime Loans

A relatively obscure piece in the Triangle Business Journal, referring to a piece in the National Mortgage News, demonstrates how some of the larger banks are bypassing the PPIP and going directly to willing toxic buyers in a very "under the radar" fashion. In this particular case, Wells Fargo (WFC) has apparently offloaded $600 million in subprime loans to Arch Bay Capital at 35 cents, or double what other hedge funds had offered. While the price discrepancy alone is worth a follow up, the TBJ had this interesting tidbit to note about the transaction:

No one involved in the recent sale is talking on the record, which may be a key reason lenders will look to private transactions to unload bad assets rather than turn to a government-sponsored program.

It is very interesting how many other comparable portfolios Wells Fargo has been offloading without public notification, at what price, and how much of an MTM hit it has had to endure as a result. What is confusing from this development is that the bank would be willing to take a 65 cent hit (which on $600 million is not, or rather in the pre-taxpayer-guarantee-of-everything days, used to not be, peanuts), when it could keep the loans, even if massively non performing, and sell into the PPIP at what the FDIC would announce is a much higher and "fair" price. Is Wells admitting it realizes that PPIP is a failure and thus is pursuing private transactions even at a major loss? The discovery of comparable transactions by other banks would be useful to determine if this is indeed the case.

hat tip Mike

Comments

[yellowhoard:]

I can't argue with your logic Tyler.

Wells Fargo is either addle minded or thinking several moves beyond everyone else in this chess game.

Jul 16 07:52 AM

[Bill S. Friend:]

Financial companies are scrambling to cover losses like a cat in a sandbox. Arch Capital will probably wait awhile, issue huge bonnuses to management, then go bankrupt leaving the taxpayer with the bill. Where are the regulators on these transactions? CNBC stated this morning that JPMs Jamie Dimon took TARP funds "to be a good citizen". Really laughable. All the subversion gets my spidey senses tingling, as to the real state of the economy.

Jul 16 07:55 AM

[Vienna:]

As to your articles from RZb you where mentioning that if bank sell toxic assets, this might be regarded as default according to Moddys rating. How does this work for US banks?

Jul 16 08:21 AM

[bondgal:]

One mistaken notion is that these loans are being charged off, as in the present. Several WFC watchers have said the loans were remenants of long ago charged off portfolios, and the sale is actually a recovery. This i cannot confirm, but I do know that in the purchase accounting for WB acquisition at 12/31/08 approximately $40B of WB loans were "charged off" for financial accounting purposes, although they still show up in delinguencies and call reports, (ie, cash accounting) and are still being "collected."

I suppose the "analysts" are looking for bad loans to be charged off twice??

WFC is two chess moves ahead of the blogs and the analysts, who think that every delinquency is a future charge off, when in fact, in the cases of these banks who bought other banks at rock bottom prices, many of the bad loans have been charged off over 6 months ago, for financial reporting purposes.

Jul 16 08:29 AM

[RonB:]

Many of the loans Wells Fargo is selling have most likely been charged off in connection with the Wachovia acquisition. Also, the vast majority of Wells' subprime loans are debt consolidation loans, not the questionable stand alone mortgages to high risk borrowers that are held by most other banks. Their subprime is performing better than than their competitiors. The author is of this piece is generalizing, as so many do, when the intelligent thing is to look at each individual bank's loan portfolio. Wells has superior asset quality.

Wells Fargo is the largest holding in my personal and client portfolios.

Ron Beasley
Investment Advisor
rwbi.net

Jul 16 08:53 AM

[montanamark:]

i'm generally cautious on the financials, but longer term this seems to be a positive for wells; they are taking the medicine.

Jul 16 10:09 AM

[Roger Knights:]

If housing prices keep falling, the leverage will hit Wells eventually, right?

Jul 16 10:10 AM

[District Ba...:]

What WFC really needs to worry about is the commercial real estate shoe that will ultimately drop right on them. Those of us that follow banks (and only banks, as the sector is more than a full time job in and of itself), know that WB was a notoriously loose underwriter in the CRE space. Yes, WFC charged off a good deal of WB's loans in the purchase accounting transaction, but those were resedential credits - not CRE credits.

I do believe that when all the dust settles, WFC will fare better than most large banks (with the exception of USB) - but that does not mean the fundamentals aren't working against them (like all banks). If you are forced to own a large cap US bank, I suppose WFC poses some possibility of RELATIVE performance, but that is likely to still be negative on an absolute basis. If you are not forced to own such an institution, I do not see why you would jump into the US bank/thrift sector at this juncture.

Disclosure: I am neither long, nor short WFC

Jul 16 10:37 AM

[doubleguns:]

Maybe WFC is thumbing thier nose at the govt by not joining into PPIP.

Who would want to be in bed with the govt they might try to tell you who has to be removed from your board etc....

Jul 16 01:49 PM

[Bill S. Friend:]

Another take could be these loans could be the cream of the crop as someone suggested, skimmed off especially for their like minded friends.

Jul 16 04:34 PM

[countrybanker:]

Bill Friend: Both JP Morgan and Wells said they were forced to take Tarp. Give me a break.

On Wells, they have not returned TARP yet, they need it. Further, the same big bad Treasury Dept that made them take Tarp gave them a 'midnight' ruling that they could use Wachovia's net operating loss carryovers ($35B) in direct conflict with settled law in US. Senator Grassley was livid.Guess the Treasury was nice guy that day. What a joke.

Regarding JP Morgan, how could Dimon act put out by having to take TARP. Paulson owned him. Paulson/Bernanke bailed out AIG not to save AIG but to wash taxpayer $$$ thru to JP Morgan who got paid 100% on derivative contracts from a bankrupt company(AIG). Another joke.

Welld and JP Morgan are both mismanaged, both had huge financial problems and both got bailed out (excluding the TARP loans) by gifts/grants from US taxpayer.

Jul 16 05:58 PM

[hmmm.really:]

countrybanker: You're kidding right? WFC is mismanaged? Based on what criteria? Wells hasn't paid back TARP because Kovacevich pushed back hard during the initial TARP meeting and then again when he correctly called the stress tests 'assinine'. Not liking to be showed up on public, the Feds determined that WFC needed additional capital; this in spite of the fact that they used purchase accounting on 12-31-09 to charge off $40B of Wachovia's portfolio and have current revenue streams that are significantly higher than the model used for the stress tests. WFC still has to manage it's risk going, forward, but their track record and management is among the best in any industry.

Jul 16 06:27 PM

[Moon Kil Woong:]

I would like to think that there is even some garbage the government will not touch, no matter what. Hopefully these subprime loans are an example that doesn't meet that threshold. Of course, I may be deluding myself. So far the government seems to be a glutton for punishment in which case they may just be doing it to avoid public scrutiny or for other various accounting reasons that may look bad if looked into in detail as they go into PPIP.

Jul 16 11:13 PM