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:

Pivots
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

Charts
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

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

China
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

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

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

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

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