Wells Fargo Seeking Fed Shotgun Marriage

More of the many unintended consequences of government meddling....

....so lookee here, if you buy this troubled bank we'll cover 98% of the potential losses, and give you a 10 year loan at the discount rate to cover your losses? It's basically risk free! Plus we'll throw in a building in NYC for free, and oh yeh - 14K employees. Interested? It'll cost you $300M... wait, maybe $1B after the shareholders whimper.

Of course any viable bank that did not run its business in the ground would jump at that offer - so much so that they are even offering publicly to "help".  Again, of the major banks Wells Fargo (WFC) is one that has done a very good job of navigating this mess... and looks like the perfect suitor to pick up a tax payer-sponsored bailout of say Washington Mutual (WM). I mean risk free transactions are very capitalistic - creative destruction and all. Wells Fargo has its hand out - when the next disaster strikes, I'm sure the booty will be delivered by the Fed. Once you set that precedent....

• The chief executive of Wells Fargo & Co. said Tuesday that the current environment presents opportunities and that the venerable San Francisco bank would consider doing a deal in conjunction with the Federal Reserve. "I would not be averse to a Fed-assisted transaction," Chief Executive John Stumpf said in an interview with the San Francisco Business Times newspaper
• The bailout of crumbling investment bank Bear Stearns by the Federal Reserve and the Treasury Department 11 days ago has investors wondering how far the government will go in playing matchmaker to stabilize the troubled markets.
• Wells Fargo, with its good standing after a year of widespread write-downs and a rapidly slowing economy, would likely be at the top of the list as a suitor for many banks. It's the only one of the nation's five largest banks to have maintained a AAA credit rating from Moody's Investors Service and Standard & Poor's. (should we be happy for Wells Fargo or what does this say about the other 4 top "financial institutions" in America? That light regulation thing really worked out great...)
• Still, the San Francisco newspaper reported Stumpf said he would be willing to risk that rare designation in exchange for the chance to snap up a target at a bargain price.

Such a kind offer. Too bad the other banks are in such shoddy stage or else we'd have a bunch of banks lining up to be on the Federal Reserve Christmas gift list. Quite a sad state of affairs so few are in position to take advantage of this offer due to their own troubles...

Comments

[mygoals]

So, which is the better short-term play, WaMu or Wells Fargo?

[pepster]

After watching what happened with JPM and BS, I too have been thinking that Wells Fargo might engage in a Fed-assisted buyout of WaMu should things at WaMu go downhill. Here are some other thoughts on this possibility:

1) Both Wells Fargo and WaMu have a large presence in California. Given this overlap, is WaMu really a good fit for Wells Fargo? Granted, there might be other assets at WaMu (a contrarian play on MBS's a la BofA's purchase of Countrywide perhaps?) that might attract Wells Fargo.

2) Thinking further down the line. . .let's say Wells Fargo does indeed buy out a teetering WaMu with assistance from the Fed. What happens if another large bank (Goldman?) starts having trouble? Now that JPM and possibly Wells Fargo are out of the way, how many other banks are out there that have strong enough balance sheets to take on other troubled banks? I don't know the answer to this, but probably not many.

[charliebrown]

it's always the prey - WaMu in this case

[DSX Lover]

This is such a Joke how Financials are being mispriced in this ridiculous market. WAMU won't go out of Business, only $240 Billion in Loans, $326 Total Assets and $24 Billion in Equity. The company was making almost $800 Million net per quarter before the charge offs, assuming they get $2.5 Billion in Net Cash Flow for the year, this will translate in profit before this fiscal is over. Only 2% off All outstanding loans go into Foreclosure, and WAMU has reserves for 1% of all of its loans. Now lets assume they are so horrible that 4% of all of its loans go into foreclosure, it will have to write off an aditional 7.4 Billion, of which they get at least 50% back after the foreclosure property is put into stronger hands. With $24 Billion in Capital the company can easy take a 7.4 Billion hit under Bacel II rules, and still be under the minimum capital requirements. After all this nonsense ends the company won't even need to take a $3 Billion Reserve, mainly because:
Foreclosures are at peak right now. Resets of interest rates, will be at the same rate, as the introductory rates, for SUB-prime, because the FED has lowered 325 Basis Points.
Foreclosed Properties going into auction get 70%-95% of the value of the initial loan.
Strong Depositor Base for WAMU of $180 Billion, must likely to earn 2.5% or less before the year is over because rates are so low, therefore increasing the Net Interest Margin for WAMU by at least 200 Basis Points on Mortgage Portfolio, which is fixed, and increasing CASH FLOW by almost $4 Billion in excess of what is already making now. This is the time to Buy or sell naked puts, do to the huge premiums you can collect.
I'm long WAMU with Jan2010 Naked Puts Strike $15, take the $7 Premium, with basically no downside. This isnt' the end of the world.

[I shouldknow]

DSX Lover - - - -Let me correct some of your misconceptions about WaMu’s mortgage position. First of all WaMu was and still is the poster boy for Option ARMs which are probably more toxic than all of the subprime loans. The Option ARMS that they did, and are still doing, give the borrow the “option” to pay at a rate that is so low that, not only does it NOT cover any principal, it doesn’t even cover all of the required interest. The unpaid interest creates a NEGATIVE amortization that can, and most likely has, gone up to 115% of the original loan balance. At the same time, these borrowers’ (NOT small loan amounts, by the way) properties are depreciating in value. A significant portion of all of their mortgages, and an even greater portion of their Option ARMs are in the most distressed markets such as Las Vegas, California, and Florida. Additionally, many of these borrowers did no income, no asset, loans and got a second mortgage with WaMu making the total LTV 95% to 100%. These loans are just now starting to reset. The teaser rates were substantially below the fully indexed rate plus the margin. Therefore, your statement “Resets of interest rates, will be at the same rate, as the introductory rates, for SUB-prime, because the FED has lowered 325 Basis Points” is incorrect. If their loan balance is now at 115% of the original loan amount, the borrowers are required to make the full mortgage payment, including principal, based on the applicable treasury rate plus the required margin. Most of the borrowers have been making a payment based on 1% or 2% at most and excluding principal. Knowing that their mortgages with WaMu exceed the current property value buy 10% to 25%, how many of these borrowers do you think are going to be making the much bigger payment versus stop paying and staying in the property for 4 to 12 months rent and mortgage free until evicted by the Sherriff at the foreclosure. My guess is not many.
Granted, traditionally “Only 2% off All outstanding loans go into Foreclosure”, but these are not traditional times and WaMu is NOT sitting on a high percentage of “traditional fixed rate loans”. Your statement that “Foreclosures are at peak right now” is ridiculous, they have not even started to peak. I am guessing that they will peak at the end of 2009 or very early 2010.
I have 38 years experience in the retail mortgage business and oversaw an average of $100 million per month in retail fundings over the past 14 years. I am intimately aware of the mortgages WaMu originated and funded during that time, a substantial portion of which were originated through the worst possible method, mortgage brokers. Brace yourself..

I have no financial interest in WaMu and could not care less if they survive, fold, or are acquired.

[DSX Lover]

You know everything with 38 years of experience. You know nothing, no Mortgage payments are being made on 1 or 2% interest rates on WAMU Loans, Only Mortgage Brokers are dumb enough to do that and to believe on that statement. Not all loans are SUbprime, only 15% of all mortgages where subprime, like I said if they all default they can call be covered by WAMU's capital of $24 Billion, even when the recovery rate is over 50% of the initial loan value.

[Bman]

Hey...I should know...check your facts. The Option ARM ltv's for WAMU are published. Although your comments are logical...they don't apply to this reality.

[John Egan]

Very good point from pepster:
1) Both Wells Fargo and WaMu have a large presence in California. Given this overlap, is WaMu really a good fit for Wells Fargo?

Wells is a very aggressive bank and has been buying up small credit unions... In fact they bought my local Credit Union recently - Here in Calif... Apparently they **are** trying to grow by purchasing customer base, and they are accepting of California based business. I'd guess that they expect that the economic issues in Calif. will clear up eventually.

Thx jegan ;-)

[Bman]

Come on..."the power of yes" is associated with vintages years before the meltdown. I think the delinquency information shows that the vintages that are bad are far more recent. Without question, Option ARM's are part of the story, but you clearly have an axe to grind. Come on. You are part of the hysteria...not the history. Oh wait...you are only speaking from a point of history.

I would like to point out that Fannie Mae is seeking additional credit. The is an article today about practices at Chase to get around income requirements (look up the ticker and the article is there). How are these linked to WaMu?

Let's all say it..."WaMu bad". Okay, that was cleansing.

Yes, I have a financial interest in WaMu and yes, I feel stupid for it (didn't sell enough on the way down). I just don't like bitter former employees making it worse.

[Local Lender]

Wells Fargo has the liquidity to pick and choose, so why not... The upper management team is strong, and has been for a long time. Wells chose not to offer the Option ARM when many did. I can tell you someone at the top of Wells house while in the employ of WAMU was a huge promoter of the Option ARM, and If I'm not mistaken Wells bought quite a chunk of WAMU's servicing portfolio not all that long ago, I can only imagine that pool included a few Option ARMS. It is also good to see that a few here have noted that the "Brokers" were selling a HUGE amount of the Option ARMS to the public, and while the regulators may hold some responsibilty, at some point the end user, AND the investors have to take a look closer to home. Big gains typically go hand in hand with big risk. During the "Option ARM period"... with huge home appreciation borrowers didn't look past the lowest rate, lowest down, and/or the lowest fee, and would shotgun their info to several "lenders" at once.. GREED set in. With this said, in their thirst to BUY, they chose to conduct business with whomever told them what they wanted to hear, and forgot to find out if the loan officer knew there was a T in mortgage. The borrowers, the loan officers, the real estate agents, and the investors... they all flocked to the land of good and plenty. Today... those "professionals&qu... who remain in the buisiness have the daunting task of dodging the stones cast by the very people who contributed to this mess.... I am one of those professionals.
The Option ARM, "build it, and they will come"... I thought reading, and understanding documents was a pre-requisite to signing. "Regulators can't fix stupid"

[Old Timer]

The great stagecoach gang should be looking East (National City) or Southeast (SunTrust), NOT where the trail is already well worn!

[BLOSHI]

Herein lays several representatives of the U.S. financing/banking industries (i.e. probably brokers, mortgagers, hopeful investors) who are analyzing financial data and throwing their own spin on it in attempt to persuade some poor soul to buy “their” stock of choice.

Well, "BRAVO" to all that want to pore more gas on the US economic fire. You're ONLY going to make the people in the stock market who have the nerves and the cash richer; … like me. Now, I have investments in several industries including a couple financials (Before and after the bottom fell out of the cash barrel). Fortunately, my barrel is backed by two deep pockets and I also sold WaMu at almost $35/share after buying it for about $10/share in 1995.

Now, WaMu “stock” would be a nice buy, but only for the people who want to hold it as a “long term investment.” - Maybe for 3 to 5 years. It's not a good idea for WFC to buy WaMu. Why? - Some of you ask. Well... my little grasshoppers, WFC and WaMu are in the same high dollar market (i.e. California) where home prices are inflated in comparison to comparable homes elsewhere in America. Additionally, a great deal of Pacific Coastal home owners are upside down with their homes and many homeowners are walking away which equals high levels of “high dollar” bankruptcies, tax liens, real estate auctions, pre-foreclosures, and foreclosures. Now, who do you think holds a great deal of mortgages for these California home owners? Here’s a hint: Option ARMs. Yes, both WFC and WaMu hold these loans. Now, the next question I ask: Who’s in better condition to continuing doing business? Hmmm? You guessed right, WFC !!! They both are really but WFC is in much better position. Have any of you considered investing in WFC or any other companies like AMD, F, GE, XLF, RIMM, etc. Spread your fortune around. Also, …sorry if you didn’t get out of WaMu in time. But, there’s no need to follow one bad decision after another.

The fact of the matter is WaMu will survive this credit crisis with a couple of bumps and bruises and after selling some of itself and layoffs. WFC should only consider buying some of WaMu for pennies on the dollar, but not the whole thing. As Buffett would say, “I don’t want to buy other people’s problems.”

In the WSJ, there’s talk of WFC buying NCC; Now, this maybe a good decision. NCC is looking to sell itself and HSBC as well as a couple of other firms are rumored to have some interest. Let me point out that NCC is an eastern bank with a guarantee of beating the street the first quarter of 2008 and maybe for the rest of the year since they still hold about 60% of the VISA IPO shares and sold almost 40% for a nice healthy, wealthy profit. More importantly, they’re not in California. It’s a lovely state. But, it was broke when I lived there in the early 90s and it appears it’s still broke today thanks to the financial industry and several other things I don’t care to talk about.

Everybody, here’s one more thing to grow on. The financial statements are good tools for analyses. But, also consider “marketplace”. Now, this statement will make more since if you understood WFC, rather Norwest’s history of acquiring small banks in return for big bucks down the road.

Us old timers know what we're talking about.

Have fun investing!

[somerville]

I too think NCC would be a great match for WFC. I worked at WFC and WAMU. SUCH DIFFERENT COMPANIES!
WFC never originated any Option Arms. I know WFC picked up a block of business from Wamu about 5 years ago (?) that I was told were mainly fixed rate loans. Probably had a small percentage of Option Arms stuck in there too.
PS Buffet knows his stuff..stay with WFC and of course DIVERSIFY!

[somerville]

I too think NCC would be a great match for WFC. I worked at WFC and WAMU. SUCH DIFFERENT COMPANIES!
WFC never originated any Option Arms. I know WFC picked up a block of business from Wamu about 5 years ago (?) that I was told were mainly fixed rate loans. Probably had a small percentage of Option Arms stuck in there too.
PS Buffet knows his stuff..stay with WFC and of course DIVERSIFY!

[ZMaNFaRLee]

A buddy of mine works for Wells Fargo Financial and he said that they had said they might look for a presence in the east and he mentioned WAMU was talked about, this was in like a mailing to all managers I guess. I immediately thought it would be terrible due to overlap. Not just in California but in other states as well. How the heck do you efficiently merge brick and mortors all over the west coast that sit across the street from each other. They would have to close one shop leave one open and move employees.

That is my boggest argument against wamu wells. NCC does sound better to my ears. Maybe even smaller like bank atlantic or sun trust. I wonder if anyone has done analysis on those targets.

[boston RE]

Can someone PLEASE explain to me why everone is so bullish on WFC? I am a private lender and have been short the financials for quite some time. Why? Not because I am all that bright but because I see the petitions to foreclose in the paper and who the banks are that are doing the foreclosures. That said, I see WFC doing a ton of foreclosures in this state and in the worst neighborhoods! Those that are foreclosed are being bought back by WFC and are worth less than 1/2 of the principal amount! I know Buffet is a big player there now and though I was a Buffet buyer in the past (and owned shares of both BRK-A and B) I sold my positions there as I think even the great Buffet will be in trouble this year (certainly not the same trouble as the banks but I wager both A & B will be down at least 10% this year). Is it possible that Buffet made a mistake? He has after all made bad decisions in the past.