Friday, September 18, 2009

Is Wells Unwell?

One of these days, banks will begin making an increased number of bad loans again (and some good ones). Presumably the non-change agents in Washington will be continuing the game of socializing the losses when they are large enough while privatizing all gains (save taxes and campaign contributions). For the nonce, as the damage from the last crop of bad loans and fraudulent practices continues to be counted, it's not clear how severe the damage from the infections has been or will prove to be. Courtesy of Credit Writedowns, here are excerpts from a post titled Wells Fargo's Commercial Portfolio is a ticking time bomb:

In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.

According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large. . .

Both Whitney and Paul Miller of FBR Capital Markets both have gone on-air and written in notes to clients that Wells’ loan loss reserves are not enough to handle coming impairments to residential loans. Miller has a recommended stock price of $15 while WFC is currently trading around $29.

When as good an analyst as Mr. Miller project a stock price that is half the current one, fuggedabout owning the stock. I recall that when Citi was, say, a $20 stock and Meredith Whitney projected (say) a $9 stock price, gasps were heard (at least mentally). Citi of course was headed really toward zero and even after its monster rally this year remains at about half that $9 target.

Where would the stock indices be if Wells became a $7.50 stock?

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