Wells Fargo Needs Tens of Billions in Extra Capital
Wells Fargo may have posted a record profit recently, but it’s important to note that left to its own devices the bank would have gone out of business already and not be posting any profits at all. Indeed, it appears to be undercapitalized by tens of billions of dollars:
Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
This is why nothing you near from the financial sector about how all’s well should be taken too seriously. It’s true that given very bank-friendly monetary policy it’s easy for banks to run an operating profit. But most of these large banks are zombies—insolvent. They’re only able to run an operating profit because they’re not going out of business and being liquidated. And the reason they’re not being liquidated is government guarantees. It’s as if I had a profitable business selling cookies, except I didn’t actually have any cookies to sell and was just putting government-provided cookies in boxes, then bragging about how profitable my company is and how the government should stop hassling me about paying myself a bonus.
23 Responses to “Wells Fargo Needs Tens of Billions in Extra Capital”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
April 14th, 2009 at 12:39 pm
Insolvency means the inability to pay one’s debts as they fall due. Usually used in Business terms, insolvency refers to the inability for a ‘limited liability’ company to pay off debts.
If they have to borrow money to pay their debt, then I think they are technically insolvent.
April 14th, 2009 at 12:49 pm
This is why nothing you near from the financial sector about how all’s well should be taken too seriously.
===========================================================
These days it’s hard to near them anyway.
April 14th, 2009 at 12:50 pm
Actually, it’s more a case where someone ate all of the cookies and the government put our tax dollars into the till to make it look as if the cookie business is profitable.
And DTM argues that it doesn’t matter because we will find a pot of new cookies at the foot of the rainbow the next time it rains.
Why doesn’t someone go ahead and make a Sesame Street skit out of this bullshit? How the nice government helps you when it takes your candy whereas the man who gives you candy is a bad man.
April 14th, 2009 at 12:51 pm
Frankly, I don’t think Matthew could even define what “insolvent” means.
I doubt you could either Al; or more accurately, I’d expect you’d define insolvency as ‘the government has debt’ whereas a private corporation that is insolvent is merely ‘not engaging in enough bad accounting practices’.
And from previous post:
To do it, the administration would need to get congress to authorize a frightening level of expenditure that congress is, frankly, unlikely to agree to.
The administration would need to raise the debt ceiling by 5 trillion over the current budget costs and pre-existing debt. Treasury could then issue T-Bills as needed – either to swap for crappy instruments, or to pay off bondholders and the like (you’re holding a Citi bond that may default – suddenly, the government swaps you out and you’ve got a T-Bill!), or to sell to the Fed reserve for operating cash. You would not need to sell to the market directly, and you would not want to as you would then be forcing an exchange of dollars for T-Bills, which isn’t what you want. You want to force an exchange of craptacular private paper for nice, safe Treasuries. (You could even give them a special color, if you wanted. Call them Bailout Bonds.)
The overpriced debt is going to come off somehow; either thorugh monster inflation or massive unemployment and bankruptcy or government intervention. The latter is the cleanest option since we can then just stop paying Wells-Fargo rent on the overpriced mortgages they issued.
max
['There is no avoiding this.']
April 14th, 2009 at 12:52 pm
Well that would depend on the origination of those profits. Any one aware of the next two paragraphs in the above article would be hesitant to lend Wells their capital.
“First-quarter net income rose 50 percent to about $3 billion, Wells Fargo said last week in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock. The bank attributed the profit to a surge in mortgage originations and revenue from Wachovia Corp., acquired in December. Full results are scheduled for April 22.”
“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”
April 14th, 2009 at 12:58 pm
Re Obama’s statement quoted in Matthew’s previous post:
“we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. ”
———————–
Yes, that is why a con artist doesn’t explain to the mark how the mark is going to be buttfucked in the end. It’s important to build up the mark’s confidence. That’s why they’re called
“Confidence Games”.
That is also why such games always have an air of vague mystery — of being too complex for mere mortals to understand. Why the Mark is told to “have confidence” in the con artist.
April 14th, 2009 at 12:59 pm
those profits should make it easier for firms like Wells to raise new capital privately, which in turn means they may need less, if any, additional new capital from the government.
Seriously? You think fake profits from a fundamentally insolvent bank are going to get investors beating down their door begging for a piece of the action?
April 14th, 2009 at 1:04 pm
Isn’t it amazing how the Government always takes over and imitates the more successful criminal franchises?
First, armed robbers were replaced by IRS tax collectors.
Then the Mob’s gambling rings were replaced by state lotteries.
Now the US Government is doing its version of the Pidgeon Drop.
April 14th, 2009 at 1:08 pm
Why don’t Tony Soprano run for President?
Or does he prefer to run things from the back room?
Gotta admit, they do have a better grade of sluts at the BaDA Bing than at the DNC.
April 14th, 2009 at 1:18 pm
Seriously? You think fake profits from a fundamentally insolvent bank are going to get investors beating down their door begging for a piece of the action?
The banks think so, specifically Goldman Sachs. They are floating a new stock sale for $5 billion to pay off their TARP loans while claiming to have billions in cash stashed away. There’s quite a bit of chatter in the financial blogs that this and the inflated earnings numbers are a classic “pump and dump” to cheat unwary stock buyers.
April 14th, 2009 at 1:21 pm
Why don’t Tony Soprano run for President?
The Tony Sopranos of the political world tend to get tripped up before they make it that far.
http://en.wikipedia.org/wiki/Rod_Blagojevich
April 14th, 2009 at 1:40 pm
I think Matt is way off here. Some random analyst is guessing that Wells would be substantially under-capitalized if unemployment continues to rise sharply, the recession continues for another year and a bunch of the analyst’s guesses about what is happening with Wells business turn out to be right. They could prove to be right, but its not some important new information — it is an analyst’s guess justifying their negative recommendation on the stock. Treating this report as if it proved something is really a mis-read. I’m sure Matt would not have been tempted to quote Jim Cramer about Wells needing much more capital, but this is just a step above that kind of a rant.
April 14th, 2009 at 1:49 pm
This is what you get when you anoint Wall Street pigs like Larry Summers and Tim Geithner to be your ‘Economic Recovery” czars.
April 14th, 2009 at 2:56 pm
Yorker makes sense.
Seriously Matt, love the foreign policy blogging but PLEASE stop posting anything finance-related– this is just getting embarassing. Some analyst that you never heard of makes some guess as to what may happen to Wells next year, and you cite that as evidence of some point that supports your belief that business/banks or whatever are inherently bad, or something.
I’m still waiting for the post that Tiger Woods is greedy and bad because he doesn’t give all his money to charity and is driven by the quest for fame.
April 14th, 2009 at 3:03 pm
If unemployment hits 12%, they’ll have a hard time raising capital.
The GS numbers are crap. They switched earning calendars, so December gets relegated to the footnotes.
April 14th, 2009 at 3:05 pm
Borrowing money =/= raising capital.
Borrowing also means increased debt. Or to say paying debt with debt. Cash account will go up yes, but the liabilities will increase accordingly, where equity will not. So yes it is feasible that a company can get a loan every time it needs to pay a loan, but I do not believe that really fixes the original problem. Loans should be more focused at creating sustainable profits, with which you then use your retained earning to pay those loans down.
April 14th, 2009 at 3:08 pm
GS, like some other banks, have done very well on the trading side. Investment banking, not so much, but the firm overall is doing pretty well considering the recession/depression.
April 14th, 2009 at 3:22 pm
Nitch, you misunderstand a term of art. ‘Raising capital’ has the colloquial meaning in the banking world of “raising equity capital.”
April 14th, 2009 at 3:29 pm
I may not grasp the situation correctly. When I refer to equity, I mean Owners equity as you would find it on the balance sheet. But maybe I have the wrong idea.
I owe $5, so I borrow $5. I now have $5 in cash and $10 in debt(liabilities). I pay $5 off my debt, now I have 0 cash (equity capital) and $5 of debt.
I may be missing a step somewhere.
April 14th, 2009 at 6:01 pm
Nitch, you are correct that equity refers to owner’s equity, but your example does not reflect “raising capital” and is in fact incorrect, since cash (on the left side of the balance sheet) is not equity capital (on the right side of the balance sheet).
Let’s say I owe $5 that has to be paid off, I have $5 of owner’s equity, and $10 of illiquid assets that cannot be used to settle my debt. I could issue new equity and sell it for $5, using the resulting cash to pay off the debt. Now I have no debt, $10 in owner’s equity, and still $10 in assets. But the original equity holders now only own half of the business (in the lingo, they’ve been “diluted”).
If this scenario happened in real life the stock would fall, but by less than 50%. Even though the original equity holders lost half of their investment, in some sense, the probability of bankruptcy (investment goes to zero), would be reduced.
April 14th, 2009 at 9:10 pm
This report is based on an estimate. We’ll know the real truth in a few weeks when Wells’ numbers come out. There is a very real possibility that this whole 50 billion is a bunch of hokus pokus. Wait until the real numbers are posted before singing their praises or damning them.
April 15th, 2009 at 8:03 am
Nevertheless, the raw profitability of these big banks means that they probably can work through their write downs given leniency and forbearance, and hopefully some improvement in the economy. With forbearance, “insolvency” is purely academic.
My guess is that the Feds will probably euthanize a large bank or two via forced asset sales, as a sacrifice to the liberal economists.
April 18th, 2009 at 4:28 pm
[...] myglesias put an intriguing blog post on Matthew Yglesias » Wells Fargo Needs Tens of Billions in Extra CapitalHere’s a quick excerptWells Fargo may have posted a record profit recently, but it’s important to note that left to its own devices the bank would have gone out of business already and not be posting any profits at all. … [...]