Before I delve into specifically what makes Wells Fargo an ongoing Doo Doo list member, I urge those who do no normally follow me to read the precursors to this article:

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)

After reading through Wells Fargo's numbers below, I want some of you guys (and gals) with calculators and spreadsheets to review "I'm going to try not to say I told you so..." and let me know the chances of the FDIC's absorbing a behemoth such as the CDO trading, CDS writing, off balance sheet VIE having, QSPE bulging, California and Florida Zero recovery 2nd lien sporting Wells Fargo in the case some of its arcane and non-performing assets really hit the fan. I am getting ahead of myself though. Let's take this from the beginning.

Subscription Analysis - The Heavy Stuff The Free Stuff

WFC Off Balance Sheet Exposure WFC Off Balance Sheet Exposure 2009-10-19 04:11:50 259.25 Kb - The complete off balance sheet review

WFC Research Note Sep 2009 WFC Research Note Sep 2009 2009-09-30 13:01:30 281.29 Kb - The Skinny on that CDS exposure. Are they doing the AIG thing too???

WFC Investment Note 22 May 09 - Retail WFC Full Forensic Analysis & Research Note 22 May 09 - Retail 2009-05-27 01:55:50 554.15 Kb

WFC Investment Note 22 May 09 - Pro WFC Full Forensic Analysis & Research Note with Anticipated Capital Requirements under revised SCAP/Stress testing 22 May 09 - Professional 2009-05-27 01:56:54 853.53 Kb This is the document that ties all of the ancillary research togther and includes our best estimate as to the amount of capital Wells Fargo will need to raise!

Wells Fargo ABS Inventory Wells Fargo ABS Inventory 2008-08-30 06:40:27 798.22 Kb

The open source mortgage default model

Fact, Fiction, Farce and Lies! What happened to the Bank Bears?

Beware of Bank Earnings Propaganda - They are still in BIG trouble!

Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losses

Wells Fargo Q2 2008 Highlights <!-- -->

Green Shoots are Being Fertilized by Brown Turds in the Mortgage Markets

Doo-Doo bank drill down, part 1 - Wells Fargo

When the ticker WFC came up as a short list finalist in one of our scans last year, I was able to hear the cackling of those name brand groupies and CNBC junkies literally leaping from my keyboard. This is an excerpt from a free piece that I released on them exactly a year and a half ago, before the days of TARP:

"Well, the first bank on the drill down list will also be 2nd of the banks that I will deliver a forensic analysis on (the first was PNC Bank). That bank is,,, (drum roll in the background, crescendo.... I know some of you hate it when I do this........) Wells Fargo! I can hear a few of you naysayers cackling behind your computer screens as I type this. Wells Fargo is a big name brand bank (cackle, cackle)! Wells Fargo has Warren Buffet as its largest investor (cackle, cackle)! Wells Fargo this and that and blah, blah and (cackle, cackle).... All I can say is, beware of name brands (I actually felt compelled to address this in earlier posts). I have made more than a couple of dollars benefiting from name brand hubris and smaller investors who would rather be told what to do than read a balance sheet! Time will tell if I am right or not on Wells Fargo, just be forewarned - several of the banks on the Doo-Doo 32 (32 banks in deep doo-doo) list have already taken a trip to the confessional!"

Well, fast forward a year and a half and we see who was right. I urge those who do not subscribe to my blog to reference "Doo-Doo bank drill down, part 1 - Wells Fargo". Wells Fargo was actually one of the original Doo Doo 32 banks (32 banks in deep doo-doo), a list of institutions quite likely to hit the fan from an investor's perspective. I welcome all to track the well being of the banks on that list from that period to date. As for Wells Fargo, even despite extreme efforts by the government to prop it up, it appears as if I was on to something back then. Although many pundits STILL believe that I am wrong, the more I dig into the innards of this bank, the more cracks I see in its armor.

The risks posed by the housing crisis and arcane financing vehicles are drastically under-appreciated by the sell side...

Wells Fargo's high risk from its exposure to some of the hardest hit regions like California and Florida was further enlarged through the acquisition of Wachovia's ailing portfolio. The surge in NPAs pushed up the Texas ratio of the Bank to 29.9% as of June 2009 from 19.1% in December, 2008. Wells Fargo Eyles Test exceeded the allowance for loan losses by $3.7 billion or 6.3% of the tangible equity as of June 30, 2009 as against the excess allowance for loan losses over ET of $3.4 billion or 7.5% of the tangible equity in Dec 2008. As the rise in NPAs is far from subsiding, the Bank is expected to feel additional the pressure from high charge offs and provisions (see the latest news on the housing front and proposed FDIC charges whose charges have already [within a month] seen the need to be modified, see "I'm going to try not to say I told you so...").

Published in BoomBustBlog
Monday, 19 October 2009 01:00

I'm Not Defending JP Morgan, but...

I was perusing ZeroHedge the other day (a fine, rabble rousing rag after my own heart), when I came across a guest post accusing JP Morgan of some funny stuff. Those that follow me know that I really believe JPM to be highly overrated. In reviewing the authors allegations, he may actually be on to something in regards to portions of the AML stuff. In order to truly ascertain the extent, if any, I would have to dig a little further, which I don't have the time to do right now.

I feel he is jumping the gun on the general liquidity argument though. No disrespect intended to the man, for anyone willing to break out a calculator and dispel the "this is the best thing since sliced bread" propaganda and disinformation is cool in my book.

Published in BoomBustBlog
Thursday, 15 October 2009 01:00

And the next AIG is... (Public Edition)

I have posted this warning of Bank of America's naked swap writing to my subscribers a few weeks ago. Since BAC is reporting this week, I have decided to make my suspicions public. I have found evidence that this bank has $32 billion of naked (as in apparently unhedged) swaps on its books - just like AIG. The difference is this bank is bigger, probably has more exposure, and has already been bailed out - several times. Oh, did I mention the insured collateral is nearly half BBB rated or lower??? How about extreme management issues at the top, and I mean all the way to the top (the CEO may actually bring down the ex-treasury secretary and maybe even the Fed Chairman. A trunk full of junk, surrounded by drama! It should be an interesting conference call tomorrow when they report, that is if anybody decides to ask the right questions...

As many of my subscribers and readers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable, and in retrospect, the blatantly obvious. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few of my readers may have their eyebrows raised. Some things are actually hiding in plain sight. I have made this short description of what I see as Bank of America, the naked swap dealer, available for free download, but you must register (I made the process very quick) to get it. I know it is a pain in the ass, but I want to be sure that the disclaimer is acknowledged by all who access the document. Thank our litigious society. See BAC Swap exposure_011009 BAC Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb. I need for all to know that, in my opinion, bank reporting is quite opaque, so it is not very easy to get granular information out of it. The conclusions drawn from this post and the accompanying downloads are derived from BAC's publicly available documents and are the result of my best efforts to piece the information together. For those who do not know of me, you can reference the "who am I"section below to see how well this process has worked in the past.

For the sake of nostalgia, here is an old post of Bank of America's estimated ABS inventory: BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes. I will be releasing similar analysis of other banks and insurers to subscribers over the next day or two, and then to the public a day or two before their respective earnings announcement.

The following is the bailout AIG story as excerpted from Wikipedia and annotated the BAC way by your friendly neighborhood blogger, Reggie Middleton, in bold, italic font:

Published in BoomBustBlog

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively.

Published in BoomBustBlog

Note to readers: a formatting issue caused the 2nd half of this article to get cut off. I urge interested parties to reread the article to get the full message.

Since I write for a diverse audience, I will start this off with an overview of securitization. If you are in the industry or are just a smart ass dude, feel free to skip down to the JP Morgan specific section below. I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is.

Overview

Securitization is still a very significant source of leverage and opacity in the US and European economies, in spite of its predominant role in the most recent global financial turbulence. It is a practice where loans and other debt instruments are aggregated in a pool and thereby used to issue new securities. Banks and financial institutions started establishing Special Purpose Vehicles (SPV) and Qualifying Special Purpose Entity (QSPE) under the FASB rules to securitized loans and thereby reducing, from an accounting perspective (but more accurately put), or transferring from an economic perspective, financial risks on their balance sheets. Although these new founded QSPE's were rated by rating agencies (Moody's, Fitch, S&P among the few) prior to the issuance of securities, the underlying ratings failed to capture the actual economic value of the underlying collateral. Furthermore, the ratings established by the rating agencies are an assurance of performance.

Published in BoomBustBlog

One of the quandaries of running a subscription service is that when you have some really juicy stuff, you inherently limit the audience that you are able to reach. Normally, this isn't that big a deal. When you believe that there is a mass cover up aiming to prop up the largest cadre of zombie, insolvent companies in modern history it becomes a much bigger deal. This leads me to distribute a significant amount of research for free. On that note, I have been following the breadcrumb trail of hidden (or more aptly put, concealed) corporate liabilities, and it has led me to (of all places) off the balance sheet of the big banks. I have spent a lot of time concentrating on exactly where the losses, if any, will come from in these banks. We have already established that the smaller banks had, have and will totally drain the FDIC's insurance fund over a year and a half ago (see As I see it, 32 commercial banks and thrifts may see the feces hit the fan blades Friday, 23 May 2008, notice how many of the banks have went under since then) in the post "I'm going to try not to say I told you so...

I would also like to add that I have raised the flag on this regional bank/commercial real estate issue many months before the sell side and the main stream media said a peep. This is not to brag or boast, for I am a fundamental investor and the market has definitively ignored the fundamentals for 7 months running. The point that I am trying to convey is that analysts in the big sell side banks work for their trading desks, underwriting and sales departments, and not for the investor (be it retail or institutional). Thus, proclamations of "Buy! Buy! Buy!" do not necessarily mean we have entered into a fundamentally firm area in which to buy stocks, bonds or any other risky assets covered by these guys. For a sterling example, see "The sell side is pushing with all of their might to inflate the market...".

As a matter of fact, I have also focused on those very same brokerages, banks, insurers and REITs that went bust, starting as far back as 2007, again before it was fashionable to do so (see Is this the Breaking of the Bear? January 2008, GGP and the type of investigative analysis you will not get from your brokerage house November 2007 to December 2008, A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007, etc.)

Now, that everyone feels the coast is clear and we will be entering a new bull market amid a broad economic recovery sprouting green shoots all over the place, I am intent on quantifying what remaining risks there are - if there are any remaining risks I am also in the process of fine tuning the market neutral strategy that can produce profits up until and through the period that these banks bring the market and economy back down (see Option Strategy Analysis Update for the strategy analysis and their performance thus far).

Published in BoomBustBlog

Yes, Goldman Sachs, the big, powerful, influential Wall Street bank put out a big buy reco on the very same banks that I have called insolvent. You can guess what happened, in damn near real time... First, Wells Fargo, JPMorgan `Attractive' on Earnings Outlook, Goldman Sachs Says - then... Stocks in U.S. Climb as Goldman Upgrades Banks, ISM Index Beats Estimates. I know I don't carry that Goldman pedigree, you know being a brother from Brooklyn and all. Yet, Goldman and I have disagreed on this very same issue before. Let me refresh your collective memories...

Published in BoomBustBlog
Thursday, 01 October 2009 01:00

And the next AIG is....

As many of my subscribers know, I have caught many companies on the short side as they imploded. One company that I did not get was American International Group. The reason it escaped me? I was too close to it. I have met Frank Tizzio (then president), Maurice Greenburg (then CEO and Chairman), and a several of their upper management to collaborate on deals, and was impressed with the way they ran their shop. Because of this, I didn't apply the same critical, skeptical eye that I used with the other prospects. Alas, because of such, I overlooked the inevitable. Well, I have learned my lesson. The lesson learned from AIG was not wasted on me, but does seem to have been wasted on many others. With this thought in mind, let's review the net, unhedged swap exposure of a few of our analysis subjects. I think a few subscribers may have their eyebrows raised. Some things are actually hiding in plain sight. See BAC Swap exposure_011009 Swap exposure_011009 2009-10-01 10:44:45 1.02 Mb.

For the sake of nostalgia, here is an old post of the same company's ABS inventory: BAC ABS Inventory ABS Inventory 2008-02-25 06:48:09 0 bytes

I will be releasing similar analysis of other banks and insurers over the next day or two.

Published in BoomBustBlog

The other shoe is dropping on the banking industry, and market reaction seems muted. This is interesting, for the demands of cash, deviations from expected returns (the technical definition or risk) and murkiness in realistic valuation of assets and liabilities are all converging to a point that bank insiders fear to tread.

First we will go through yesterdays news, then prance through some BoomBustBlog.com exclusives in a separate post...

Published in BoomBustBlog