Wells Fargo: A Growth Stock During the Great Depression? 22 comments
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With all the talk lately of a sharp economic contraction, Wells Fargo (WFC) investors and depositors might find it entertaining to know how their bank, with its famously strong balance sheet (uniquely AAA rated), prospered during the great depression of the 1930s.
Specifically, according to "Stagecoach," a history of the bank published by Simon & Schuster in 2002: "From 1929 to 1936, Wells Fargo increased the number of its deposit accounts from about sixty thousand to nearly eighty-five thousand and doubled its deposit base from from $125.6 million to $250.7 million. Customers, especially business customers, were voting their money with their feet and moving to solid ground."
Turning back to the present day, it is clear that WFC will have heavy loan charge-offs in the quarters ahead. However, if you look at their last quarter, their net interest margin was up nicely (4.92% versus 4.89% in the prior year and 4.69% in the prior quarter). This trend of an increasing net interest margin will only be furthered along by the current flight to safety among depositors and the willingness of borrowers to pay up for any credit at all.
Disclosure: Long position in WFC.
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This article has 22 comments:
If you look at the number of accounts opened versus the value of deposits, you can clearly see that the people creating new accounts during the depression were in some way wealthier than those already holding accounts, suggesting WFC was expanding into a void in a relatively new market. Today it's grown rather sizeable in its old market venue and has to compete in all other markets. What WFC has going for it now is not what was going for it 70 years ago. Still strong though.
Remember, Buffett is never wrong on his big bets.
Buffett himself would beg to differ with you. He sunk a lot of money into USAir Group -- which was a huge losing trade until some "bright" state pension managers from Georgia decided to buy USAir and bail Buffett out.
Buffett was a big investor in Fannie Mae -- but after holding the position for several years he bailed out and called Fannie a disaster waiting to happen.
Lets not forget one of his biggest purchases was General Re, which came with billions in undocumented derivatives trades that eventually led Buffett to call derivatives weapons of financial destruction.
Too many of Buffetts disciples only remember his winning trades-- like everyone else, Buffett has had some failures too.
As for Wells Fargo -- the company is extraordinarily concentrated in California, which is having one of the most severe real estate collapses in the country.
Some people like to claim WFC is more conservative in lending, but there isn't much evidence behind this folklore. It might be true, but the only "evidence" anyone ever gives is that "everyone knows Wells Fargo is more conservative"... If they were really more conservative, we should have seen a terrible plummet in the amount of loans they were writing near the peak of the real estate bubble -- but instead we saw a continuation of the trend. Doesn't sound like they were turning away people.
I happen to have several colleagues who received **unsolicited** home equity loans from Wells Fargo through the US Mail. They never requested the loans, so obviously they didnt fill out any liar loan type documentation -- or any documentation. All they had to do was endorse the back of the check and deposit it in their checking account and the loan was activated!!!!
I know this is very anecdotal evidence, but it really made me reconsider the "accepted wisdom" that Wells Fargo is more conservative in their lending.
www.dataroma.com/m/hol...
The chances are that with more additions and rising stock price, wfc may in fact surpass KO and become his largest holding. He actually spent more money buying WFC shares in 2007 than JNJ, and that's inspite of the fact that he already held a large chunk of wfc. This is buffetts proverbial fat-pitch, and of course other investors are completely oblivious to it. But that is what makes him great. He sees things before everyone else does. He saw the credit crunch comming, he saw the disaster waiting to happen with derivatives and the very likely real estate bust. And yet, he kept adding to his wfc position. He knew that wfc's earnings were not peak earnings - that if anything, the credit boom had intensified competition, thereby making life harder for conservative and well managed banks like wfc. Ironically, the credit crunch has now given wfc an opportunity to increase market share and benefit from rising margins while other banks are selling assets to shore up capital.
Buffett is a genius.
If WFC goes up and/or KO goes down -- that still doesnt provide any evidence about whether WFC was a conservative lender.
Buffett saw the disaster in derivatives coming precisely because they caused him so much pain in his General Re purchase -- he got burned, it wasn't foresight at all.
General Re was his largest single purchase -- WFC and KO are only his largest holdings in publicly listed companies, they are much smaller in size than GenRe
Avoiding option ARMs (assuming they really did avoid them) is important -- but it doesn't tell us anything about their underwriting of other mortgage types. If they lent money on overpriced California real estate, they can still have massive losses. Its hard to imagine how they could have avoided that mess entirely.
And to RobM: constantly repeating that WFC is very conservative does not make it so... it just makes you sound like a parrot. I readily admit my only experience with WFC is very anecdotal and not a good basis from which to draw an opinion... I would love to see some actual numbers about WFC's loan underwriting, rather than mindless religious chanting.
I have had several dozen Wall Street "analysts" try to sell me credit products related to WFC and they CONSTANTLY repeat over and over that WFC is super conservative -- but not one of them has been able to show me any numbers.
That doesn't prove anything about WFC -- but it does tell me the crowds are dangerously mindless. Following the mindless crowds is a great way to lose a lot of money
Paulson said the U.S. economy is in a ``a very fragile situation'' even with enactment of the bailout. ``We will have turbulence and turmoil in our financial system for some time,''
Don't let the fact you have no money stop you! Don't let the fact that every country in the world thinks that we are idiots and that they are currently in the process of limiting exposure with our economy bother you!
BUY! BUY! BUY!
How on Earth do you think we got into this mess in the first place?
The pessimists worry about dropping home values. There are really only three reasons home values matter -- if you want to sell your home or you want to borrow against it or you have an ARM and want to refinance to a fixed. Wells did not do a lot of ARMs -- the average length of a mortgage is about 12 years --most people have no reason to sell their homes right away and will just ride out this cycle. Wells also has a presence in markets where values are not dropping like they are in California --so they still have the ability to do Home Equity lending in other areas of the country (check out Texas).
Will they have more write-offs --of course --but they are no where near as bad off as some of the pessimists on this board indicate. If you think they are fooling people by hiding bad loans -- then they have a lot of people fooled -- they were just listed by an independent organization as one of the 10 safest banks in the world --the only American bank on the list -- Congress and the Fed have looked to Wells to determine how they avoided the mess other institutions are in -- they still have their Triple A rating --the only American Bank to have this rating. Even the few analysts who have rated them a "sell" or "underperform" are beginning to get on the stagecoach. Are all these people less knowledgeable than you? Is Buffet less knowledgeable than you?
When the stock price gets to $50 you will be saying I should have gotten on the stagecoach when it was in the 30's.
The community has been rushing over to open their accounts with WFC this past month! (esp from WAMU) Add it up, there will be short term issues obviously, But definitely a hold on this stock and maybe even a buy..very soon.
btw SOMERVILLE..i live in somerville MA on prospect hill