All’s Wells that lends well

By Ben Walsh
January 11, 2013

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Being boring continues to be highly profitable for Wells Fargo. The nation’s largest bank by market cap reported $5.1 billion in earnings today, another record quarter. Lending continued to grow, and the bank originated $125 billion in mortgages, up 2% from last quarter.

The FT’s Tom Braithwaite explains why Wells Fargo’s shares went down rather than up today: its net interest margins — the profit it makes on the difference between what it borrows at and what it lends at — continues to fall. The WSJ reports that banks like Wells Fargo have too many deposits and complain of having too few creditworthy borrowers:

Deposits reached a record $10.6 trillion at the end of 2012, according to Market Rates Insight Inc., a San Anselmo, Calif., firm that tracks deposit data. Meanwhile, the share of each deposit dollar that banks lend out hit a post financial-crisis low in the third quarter.

But is Wells Fargo’s business model still too opaque for investors or regulators to comprehend, as Jesse Eisinger and Frank Partnoy argue? Wells Fargo CEO John Stumpf was dismissive: the “company is pretty plain vanilla… I’ve never seen us be more transparent”. Matt Levine puts it a different way: “if Wells is a giant hedge fund, it’s a pretty boring one”. If Wells is putting its cash into opaque investments rather than lending it out, Levine writes, it’s mostly investing in very low-risk assets. Wells just has “more cheap funding than it knows what to do with”.

Wells shareholder Warren Buffett doesn’t share Eisinger and Portnoy’s worries. US banks, he says, “will not get this country in trouble, I guarantee it… The capital ratios are huge, the excesses on the asset side have been largely cleared out”. (Buffett is an investor in four of America’s seven largest banks.)

For the moment, those excess deposits seem to be invested very conservatively, which means that Buffett may be right. But there’s still nothing, really, to stop that cash from someday ending up in CDX.NA.IG.9. — Ben Walsh

On to today’s links:

How Samsung shocked geeks and became the biggest tech company in the world – Farhad Manjoo

Bold Ideas
Japan’s central banker is heroically rolling out a 10.3 trillion yen stimulus – Matt Yglesias

Good News
Long-term unemployment is finally starting to fall (albeit slowly) – WSJ

Popular Myths
We’re actually a lot closer to closing the deficit than you think – CBBP

Right On
“The debt ceiling is arbitrary, doesn’t affect the deficit, and serves no real function in keeping spending down” – Jerrold Nadler

A cool new way to measure the labor market – The Atlanta Fed
Will the economy grow in 2013? Depends what you mean by “grow” – Calculated Risk

Boys Clubs
All 13 executives reporting directly to Citigroup’s new CEO are men – American Banker

A cool profile of an MIT economist whose “natural experiments” are changing education – MIT

The world has two economies: China, and everyone else – Diplomat

Headline of the Day
“Professor attends conference” – Salisbury Post

The Fed
When central bank independence fails – Gillian Tett

Crisis Retro
Jack Lew and how we all forgot about financial reform – Heidi Moore

Big in Japan
“Infidelity phones” that hide people’s affairs – WSJ

Peak Pirate
Pirate retires to spend more time with treasure – BBC

Attention Thomas Freidman: Amtrak is upgrading its WiFi – Chicago Tribune

39% of fund managers beat the S&P last year – Barry Ritholtz

S&P says minting a trillion-dollar platinum coin wouldn’t lead to a US downgrade – Dave Weigel


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Disclosure ahead of time: I’m long Wells (actually Wells Fargo’s 2018 TARP warrants, but I’ve also been long the stock in the past).

Yes, Wells is a hedge fund like all the other big banks.

The good news is that it is much less of a hedge fund than all the others. I think they have a small investment bank, which they acquired when they bought Wachovia during the crisis. They didn’t have one before, they were solely a retail bank.

But still, Warren Buffett’s thing is that he mainly invests in companies whose management he trusts. He has very high trust in Wells’ management. And certainly, they have been the least unstable of all the banks. I very much doubt that Wells would put any significant sum in CDX.NA.IG.9. There’s nothing to stop that bar good management, but Wells has good management. Wells has always stuck to its knitting, and they’ve always known that whatever crap the other banks are spinning, they just need to stick to their knitting and they’ll profit well enough.

Of course, Wells may have exceptional management and exceptional discipline in keeping their hands out of the casino, but Wells is at the 90th percentile in terms of management quality and discipline. We can’t write public policy assuming that all the banks are as sane as Wells. Just as we can’t write public policy assuming that all of the banks which dabbled in investment banking had as good risk management as JP Morgan – because as it turned out JP Morgan was not as good as they thought they were.

If we forced the banks to break up, I personally would be unhappy for Wells, but it could well be the best step for the country. Or we could force all retail banks and all investment banks to hard divest. Whatever. I think we can be not skeptical of Wells and still think that the banks need major reforms.

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