Banking maven Chris Whalen has a must-read piece on the reckless real estate risk taking underway at Wells Fargo, the sanctimonious #4 bank. While I sometimes take issue with Chris on his readings on capital markets related businesses, he is solid on his knowledge of traditional banking and also has access to very good intelligence in that arena.
Thanks to the crisis just past, we tend to think of banks as creating danger to bystanders via their over-the-counter trading operations: securitizations, CDOs, derivatives, all that stuff that is now loosely termed as “shadow banking.” But the US crisis prior to that was the S&L and the less widely recognized LBO debt meltdown of the early 1990s, both traditional bank lending. Even though economists airily wave it away as damaging but not catastrophic, it didn’t look that way at the time. Citibank nearly failed and the entire banking sector was really wobbly. Greenspan engineered an extremely steep yield curve to help banks earn their way out of the hole faster.
Wells is in the awkward position of being a monster traditional bank, when its big retail bank competitors, Citi, Bank of America, JP Morgan Chase, also have substantial capital markets businesses. Citi has long had a leading foreign exchange and money markets business, and has a corporate cash management operation which in and of itself makes it too complicated to fail. Bank of America absorbed Merrill. JP Morgan, in addition to having a large investment banking business, also has a huge derivatives/tri party repo clearing business. That means they have more diversified sources of earnings.
Whalen points out how real estate dependent Wells is. In this way, it is not unlike Lehman and Bear, subscale players in investment banking who put their chips on real estate as a way to (hopefully) grow faster and catch up with the big boys. The difference between the now-dead investment banks is that they were at a competitive disadvantage by being smaller (in a crude simplification, you have to have pretty close to 100% of the infrastructure of the leaders, and since there are real returns to scale, for instance, big network effects in trading, the further you are away from 100% of their trading volume, the worse your economics are. That means competitors can poach not just individuals but entire teams, since they will produce more on a platform with bigger activity). Wells isn’t so much at a competitive disadvantage via not being as big, but is instead a prisoner of having been overweight real estate historically.
As Whalen makes clear, Wells is engaging in accounting games to make it look better than it is. The San Francisco bank is hardly alone it that, but Whalen depicts it as worse in this regard than its peers. It is only taking losses on its least bad real estate loans, and using those to value the rest of its portfolio. On top of that, as we pointed out, Wells has been releasing loss reserves aggressively since early 2009, something which we suspect will prove to have been ill advised (oh, except for the senior executives who collected bonuses between then and now). And lacking other high margin businesses to earn its way out of its hole, Wells is doubling down in real estate lending, and on top of that, engaging in yet more dodgy accounting. Per Whalen:
There is an old saying on Wall Street that when a company does not say anything to investors and the analyst community, then it is all bad. Since the start of the crisis, Wells has made an art form out of failure to disclose, particularly when it comes to the credit loss, doubtful and past-due experience on the bank's retained loan portfolio and related loss reserves. While Wells' peers among the largest banks have increased written and oral disclosure regarding loan losses and related data during the past three years, Wells consistently has stonewalled the investment and analyst communities. Most recently, Wells has even defied a subpoena from the SEC, failing to produce documents for a formal investigation regarding possible fraud in the creation of residential mortgage backed securities that the bank sees as "inappropriate."…
Several participants at the HW conference told me that Wells is literally buying market share by writing loans which are not economic, but then enhance current earnings by booking the estimated value of the "customer relationship" up front in the quarter when the loan is closed. If this type of accounting gimmickry makes you recall the days of the dot.com bubble, then you are on the right page.
Whalen argues that Wells will take a hit when Basel III is implemented because banks will no longer be able to afford to retain mortgage servicing rights. This is his only worry that I discount, because Basel II was never adopted in the US and there are reasons to think Basel III will not be either.
The picture is just as troubling on the commercial real estate side:
Wells has become the leading lender to commercial property developers. One of the oldest and most respected players in the New York commercial real estate community tells HousingWire that Wells is writing business that is at least half a point lower in cost than loans available from other banks and with far easier terms.
Note that you can lose more than 100% of your money on development lending. You foreclose, losing the value of your loan, and you have to raze the partly completed project. Back to Whalen:
But to the point about Wells Fargo, the bank's aggressive lending to both retail and commercial borrowers could come back to haunt the giant lender in years to come. Many of those commercial property financings that the largest U.S. mortgage lending is putting on its books in the New York market are premised on the idea of rising lease rates in the next few years, but nothing could be further from the case.
In fact, say most of the commercial real estate developers I know in New York, lease rates are likely to keep trending lower over the next few years as the oversupply of real estate starts to become a glut.
Some of the most prominent office buildings in the city are half empty, including the showcase structure at 9 West 57th St. where your humble commentator is writing this missive. The developers are pulling the space off the market rather than accept the $50-60 per square foot that is commonly paid for prime Manhattan office space today.
The private equity firms that are buying these Manhattan commercial deals funded with loans from Wells Fargo are assuming that the Silicon Valley world of media is somehow going to soak up all of the empty commercial space in New York City…
But the sad fact is that most of the large financial institutions I know are pushing back against rent increases in major New York properties "“ and moving offices to reduce expenses.
This has the smell of something that will end badly, but it may take a couple of years to play out. As Whalen said, stay tuned.
Careful Yves…look what happened to Breitbart’s coroner. Just saying… . For example, Fuld and Callan still walking around free roaming the Hamptons with the other pond-slime, Schapiro in power, there’s no security in telling the truth.
What happened to Breitbarts coroner?
He died mysteriously of arsenic poisoning. Foul play not ruled out
WOW….Just like whistleblower and EX-FBI agent Ted Gunderson. His videos are on you tube. The video entitled the CIA and Satanism was really revealing. God rest their souls. This is not right.
Koo-koo, koo-koo, koo-koo.
One minute of Google research debunks. Two minutes if you want to be thorough.
Google debunks what exactly….?
The strategy seems to be increasing market share with the expectation creating phony profits, capturing bonuses, inflating the stock price, and ultimately laying off all the bad loans on the Fed. Don’t bet it won’t work, but I wouldn’t bet that it will work either. It is probably a good idea to avoid all financial stocks, inasmuch as all reported results are simply fantasy.
Somebody wiser than me said that the only numbers from management that he believes are the ones on the dividend check.
For a quick and amusing refresher course on what happened with the S&L “crisis” and how absolutely nothing has changed in any fundamental way:
http://www.c-spanvideo.org/program/ 15114-1
Martin Mayer oughtta be in pictures.
The same C-Span page offers all of the S&L hearings as “Related Programs”. I gotta say it: Plus ca change…
Martin Mayer C-Span link in full:
http://www.c-spanvideo.org/ program/15114-1
“The Greatest Ever Bank Robbery” 1990
They appear to be going all-in. Might be a stupid risk, but their chance of winning big isn’t negligible. Remind me not be long the equity… calls maybe, but WFC – nah.
Chris Whalen has been a bank shillster, but then sometimes so is NC. Underneath of all the Lehman-esqueishness there’s some social destruction. Whalen is one of those guys who sees the forest, and only certain trees within it. Debtors can 1.) go to hell 2.) enjoy the indifference and lack of due process 3.) get out of the way of the bulldozers.
Whalen “is” a bank shill. His writings are notable for leaving out critical facts. One in this case is the pretense that WF is a “lender”, when only a conduit for laundering money. If WF can not provide any legal answers to the SEC or any other court in years, there is a reasonable chance there is an unreasonable answer to the questions being asked of it. Money laundering is more profitable than legal activity.
Hmmmm… could you be talking about this? Title- “Wachovia’s Drug Habit”
http://www.bloomberg.com/news/2010-07-07/wachovia-s-drug-habit.html
If there is a ton of vacant commercial real estate in New York City, they ought to renovate those into residential apartments. The supply of apartments in New York is abysmal compared to demand, thus the sky-high rents and low vacancy.
Not enough apartments? No, that isn’t correct. It’s a game of keep away, just like with the post war cabins throughout the US that were/are hopelessly over inflated in cost via Wall Street criminogenics. There is more than enough to go around and always has been. The rentiers are subsidized to keep ‘em vacant. There is no free market, or some simplistic right wing excuse of fairy tale supply n’ demand.
Chris is a banker but I like Chris. Chris has revealed a lot and I have learned a lot from him. His Bloomberg interview a while ago entitled Foreclosuregate is a Cancer was very informative, a must watch for everyone. As for Wells Fargo i despise them. When they bought out WAMU they pulled our small business credit line and put us out of business after 25 years. That and a massive property tax hike by Cook County caused our home and commercial property to go into foreclosure. I am fighting both foreclosures pro se as a result of all of the corruption in Cook County. If GE cant run their business without credit…..no one can. That is because we live in a credit based economy. That is why the multinationals are thriving and small business is dying. Not including the fact that the FED is stealing from all of us and handing our wealth to their TBTF institutions and they ARE NOT PAYING THEIR BILLS WITH IT….THEY ARE EXTRACTING ALL OF OUR REMAINING WEALTH under the guise of debt which is their debt, NOT OURS and it is massive and UNSUSTAINABLE. The U.S. GOVT is aiding and abetting this and the politicians are allowing this robbery to continue and bankrupt and destroy us. This is being done to flatten us….this is called GLOBALIZATION…How do you like me now….? I would also like to add..Wells Fargo fraudclosed on my brother in law via the Homeowners Ass. after he lost his job as a bricklayer because he fell behind on the homeowners Ase. Fees and had him evicted 3 years ago without a day in court in a judicial state. I agree Chris Whalen…this is another Hitler plan……..
I should say that I agree with what Chris said in his tv interview. Its another Hitler Plan…boom…cut to commercial..
Chi, Wells bought Wachovia. JPM bought WAMU.
You are right. Thank You. The woman who worked for Wachovia lives in our subdivision. My husband found out that she told someone that my husband was insolvent right before all hell broke loose. That was only true when they pulled our credit line. That is what should have been done to these manipulating crooks. Different name…same FED beast.
Things that make you go hmmmm. We were turning a good profit before this occurred. We paid all of our bills on time for 25 years…never a day late.
Well Ivent, I’m glad you weren’t entrapped on a more severe level, which appears to be happening to more regular folk, more often. Perfectly timed sometimes too.
Hi ivention…you are right, it could have been worse. At least we were able to reinvent ourselves. Though we are struggling and it has been really tough we are still here. Many have committed suicide. Many have never recovered from this manufactured mess. BTW..Who is this..?
I believe deception is the crime of our time. Some say it is bank plunder. I say what allowed them to plunder and steal…? Their weapons of mass deception. I heard a report that BOFA has been pulling small business credit lines with impunity for no reason. The FED is stealing our country under the radar of most. That is the only way they will accomplish their evil end game plan…the same way they created it….secrets, lies and deception that enables them to commit fraud and steal. Half the country are still believing their lies. That is how they will pull off the theft of our National Sovereignty. For gosh sake…how many people know that the healthcare bill is not about healthcare at all. It is a coup de tat of our infrastructure disguised as providing affordable healthcare. They plan to microchip us via healthcare and the gold backed dollar. We need to issue our own currency backed by our own natural resource revenues…electric and natural gas and ABOLISH THE FED…that is the only way to maintain our National Sovereignty. We have everything that we need right here in America. Globalization is a scam that only benefits the Globalists.
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