Is Wells Fargo Looking to Purchase AIG-UGI?

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Includes: AIG, UGI, WFC
by: Bruce Krasting

I have been writing about the ills and problems of the Mortgage Insurance industry for some time. I have been particularly vocal on AIG-UGI (United Guaranty). It has been my view that AIG should no longer be in the high-risk mortgage business. There may be a Phoenix rising at UGI. I hear that Wells Fargo (NYSE:WFC) is taking a hard look at the Company.

On April 30th there was a company announcement regarding a decision to close UGI. On June 1st AIG appointed Eric Martinez to replace the current CEO William Nutt. That got my attention. AIG would much prefer to sell the business than to close it and absorb the book losses. It would be better for the taxpayers to get this division into stronger hands as well.

There are regulatory issues regarding this potential acquisition. Generally, those can be resolved. In this case, I am sure that a way can found to facility this purchase. Valuing the business will be no small task. In my opinion the mortgage insurance industry is more than halfway through the credit default cycle. There are many ‘ifs’ to that assumption but if I were to be correct it would imply that the UGI book of business has $1 billion + of additional losses in front of it.

My complaint with the PMI industry is that they abused any reasonable credit standards. They were a significant contributor to the over leveraging of residential RE that has taken place. The existing players in the industry are all walking wounded. The last 18 months killed them. Collectively they have insufficient capital to weather the storm. I, for one, would not take their guaranties to be worth much. The state of the industry creates an interesting opportunity for a new player.

Wells has the resources to make this work. They have the origination side of the business in-house. Therefore they can retain the sell side revenue. They also have the capital and the balance sheet. Most importantly they have the people resources and the credit judgment to manage the risk. Everyone has been banged up with mortgage credit losses. Wells is no exception, but they have done a much better job then most of their peers. My view is that they have the savvy to price and manage the risk successfully.

If Wells decided to go ahead with this purchase I think that they could bite off a 20% market share in what was once a trillion dollar industry. They could accomplish that as fast as they wanted to. The demand for the product is there. If Mr. Kovacevich, the Chairman/CEO of WFC does decide to put his foot in this water I believe it will be a home run. There is a lot of money to be made if the economy is in fact stabilizing.

If this deal does get done I would call it another one of those ‘green shoots’. PMI is a derivative of second mortgages. This type of over leveraging compounded the problems of the past few years. That said, there is currently a need for new sources of liquidity in the mortgage market. WFC’s presence in the mortgage insurance industry would be a big plus to the housing market in general.

Disclosure: I have no positions in WFC or AIG.

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