New off-balance sheet rule: Little impact on Wells

Jan 21, 2010 00:21 UTC

The new accounting standard requiring banks to bring assets back on balance sheet had a negligible impact on Wells Fargo. Despite having over $2.0 trillion of off-balance sheet assets, Wells consolidated just $10 billion of risk-weighted assets when the new standard took effect January 1. (See slide 17 in the bank’s supplemental earnings release)

wells 166 better

The idea behind the new accounting standard is to bring hidden assets back into the light of day so that regulators can insure proper levels of capital are held against them. With Wells, this appears not to be happening.

Last summer, the bank estimated the new standard would raise risk-weighted assets by $46 billion.* In its last quarterly filing, it revised the estimate down to $25 billion.** When the standard finally went into effect, the figure was just $10 billion.

Total off balance sheet assets, meanwhile, were over $2.0 trillion at the end of September. (see page 31)

One reason for the giant difference is that “conforming” mortgages comprise a bit over half of Wells’ off balance sheet assets. These are eligible for a government guarantee via Fannie Mae, Freddie Mac, or Ginnie Mae, argues the bank, so it needn’t consolidate them since they pose no risk to its balance sheet.

Chris Whalen of Institutional Risk Analytics has argued this may be inappropriate. Some of these mortgages may be rejected by government guarantors — a more likely prospect it would seem with FHA beefing up standards. That could force Wells to take loan loss reserves against them.

A bigger question is the $900 billion worth of off-balance sheet assets that don’t qualify for a government guarantee. If indeed it’s fair for Wells to say it has so little exposure here, the bank should explain why to investors.

Ironically, the ultimate off balance sheet vehicles are the GSEs themselves: Fannie, Freddie and Ginnie Mae (which securitizes FHA loans). Though backed by taxpayers, the nearly $5.0 trillion worth of mortgages they guarantee aren’t included on Uncle Sam’s balance sheet.

With mortgage lending almost wholly dependent on GSE guarantees at this point, more of the nation’s housing stock disappears off-balance sheet every day…

——

*See page 13 of the Q2 10-Q.

**See page 14 of the Q3 10-Q.

COMMENT

I wonder how much for Bank of America, JPMorgan Chase, etc.. Sum-up everything-I think huge money will disappear.

Posted by Titus | Report as abusive

Evening Links 12-16

Dec 16, 2009 22:20 UTC

Fed repeats “exceptionally low” for “an extended period” (Fed statement) The Fed maintains that it isn’t raising rates for the foreseeable future, but repeated that it plans to end MBS asset purchases by April next year. Too bad we can’t get a surprise rate hike in order to chase risk back out of credit markets…

Wells’ CLO deal called “landmark” (Paulden, Bloomberg) The return of CLOs would be the latest sign that Wall Street is dancing again.

Big decision looms on Fannie and Freddie (Timiraos/Hagerty, WSJ) Suggests Obama could expand his commitment to Fannie and Freddie beyond $400 billion while he’s still able to unilaterally. If he waits till next year, Congress would have to approve.

Man of the Year: Ben Bernanke (Time) Ha! Ben should have said thanks but no thanks. Ten years ago Time christened Rubin/Greenspan/Summers as The Committee to Save the World. In the fullness of time, all have been proven failures. Time’s endorsement is final confirmation that Bernanke too is a failure.

Norway raises rates (Kremer, Bloomberg) More fodder for yesterday’s Norway thesis. Higher rates make for a more attractive currency…

Some debt-laden graduates wonder why they bothered with college (ABC News) Full of choice quotes: “You’re led down this path of needing to go to college,” [says one indebted grad]. “The college diploma is the new high school diploma.”

Spend more. Get less. The worst fun city in America (Wachs/Eskenazi SFWeekly)

The year in photos, part 1, part 2 and part 3 (The Big Picture) More from the best photo blog on the web.

Canadian ice-fishing…

COMMENT

Agree with Andrew! A state school will be fine for most people.

Too many doors are closed if you have no degree. It’s a screening tool used by most employers. You *probably will not* get a white collar job with any fortune 500 company without a college degree or a job in any state or federal bureaucracy. Without a college degree, you had better go into business for yourself, learn a trade like plumbing or data networking, work on a rig or as a miner, etc. if you want to make good money.

Posted by Dan Hess | Report as abusive

Evening Links 12-10

Dec 11, 2009 04:54 UTC

Loopholes lurk in bank bill (Paletta/Enrich, WSJ) Companies with connections get to buy exemptions…

Treasury yield curve widens to most since 1992 (Walker, Bloomberg)

Dems want to raise debt ceiling a whopping $1.8 trillion (Rogers, Politico) So they don’t have to revisit the issue before the 2010 midterm elections…

The job market: Is a college degree worth less? (Oloffson, Time) Yes! The net present value of a B.A. has been declining for years. Look for the trend to continue as tuitions increase even as unemployment stays high and wages fall. Don’t go into debt to buy that fancy degree from a private school kids. A good state school is a much better deal right now. Save your money for an advanced degree…

Wells writing off principal on option ARMs (Cambell, Bloomberg) This is the proper way to modify mortgages if you’re hoping to keep people paying. My question is whether Wells has to write down the loan on its balance sheet and take a hit to capital. My impression was that they already took huge writedowns on Wachovia’s book of option ARM loans when they acquired it. So would guess principal forgiveness is not leading to asset writedowns.

AT&T to charge for heavy data usage on iPhones (Svennson, AP)

Shooting in Times Square, perp had Mac-10 (CityRoom) A couple hundred yards up the street from Reuters’ office….

Google goggles (Youtube) Pretty cool. Wonder if it really works.

22 million horsepower (YouTube) Flame exits the rocket at Mach 3. Temp is 4500 Fahrenheit, 2/3rds as hot as the sun. At that temp, they say, steel boils.

COMMENT

“Don’t go into debt to buy that fancy degree from a private school kids. …. Save your money for an advanced degree…”: and so the educational Arms Race continues. Or should that be Harm Race?

Posted by dearieme | Report as abusive
COMMENT

Great work!

Posted by Charlie Lefaux | Report as abusive

Buffett’s Betrayal

Aug 4, 2009 17:54 UTC

When I was 14, Warren Buffett wrote me a letter.

It was a response to one I’d sent him, pitching an investment idea.  For a kid interested in learning stocks, Buffett was a great role model.  His investing style — diligent security analysis, finding competent management, patience — was immediately appealing.

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting.  I was hooked.  Today, Buffett remains famous for investing The Right Way.  He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction.  A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money.  The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. (Click chart to enlarge in new window)

buffett-bailout2

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity.  With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years?  Recently Berkshire cut its stake to 16 percent from 20 percent.  Publicly, however, the Oracle of Omaha has been silent.

This is remarkably incongruous for the world’s most famous financial straight-shooter. Few have called him on it, though one notable exception was a good article by Charles Piller in the Sacramento Bee earlier this year.

Buffett didn’t respond to my email seeking a comment.

What saddens me is that Buffett is uniquely positioned to lobby for better public policy, but he’s chosen to spend his considerable political capital protecting his own holdings.

If we learn one lesson from this episode, it’s that banks should carry substantially more capital than may be necessary.  You would think Buffett would agree. He has always emphasized investing with a “margin of safety” — so why shouldn’t banks lend with one?

Yet he mocked Tim Geithner’s stress tests, which forced banks to replenish their capital. Why? Is it because his banks are drastically undercapitalized?  The more capital they’re forced to raise, the more his stake is diluted.

He points to Wells Fargo’s deposit funding model being more robust than investment banks’, but that’s no excuse for letting tangible equity dwindle to three percent of assets.  At that low level, the capital structure would have collapsed were it not for bailouts.

And by the way, the strength of Wells’ funding model is a result of FDIC insurance, among the government subsidies Buffett complains about in this year’s letter.

To me this feels like a betrayal.  There’s a reason he’s Warren Buffett and not, say, Carl Icahn.

As Roger Lowenstein wrote in his 1995 biography of Buffett, “Wall Street’s modern financiers got rich by exploiting their control of the public’s money … Buffett shunned this game … In effect, he rediscovered the art of pure capitalism — a cold-blooded sport, but a fair one.”

But there’s nothing fair about Buffett getting a bailout, about exploiting the taxpaying public for his own gain.  The naïve 14-year-olds among us thought he was better than this.

What would Ben Graham say?

COMMENT

Sounds like “The Rich get Richer and the Poor get Poorer”

Posted by appayne1 | Report as abusive
  •