Right before the close of trading today Meredith Whitney spoke to Maria from the trading floor. She was sharp as usual, talking about the banks. She gave her predictions for the future of the financials and was especially poignant on Wells Fargo, predicting $20 per share. (transcript below)
I have been very vocal for a year on the true hazards of Wells Fargo and their secretive ways. I worked closely with Wells Fargo for years and know for a fact their massive home equity and first mortgage portfolio is not too different that other bank’s that have honestly reported serious asset degradation. Below are links to recent reports involving Wells Fargo.
- Wells Fargo Absolutely Did Subprime, Stated, Interest Only, No Ratio Etc (71)
Posted on October 3, 2008 3:59 PM
- WSJ – Wells Fargo Cheated on Earnings Again! (27)
Posted on August 14, 2008 10:55 PM
- Mystery Surrounds Wells Fargo’s Earnings (42)
Posted on July 17, 2008 1:39 PM
- Warren Buffet – ‘Wells Fargo to Experience Unusually Large Losses’ & BofA May Cut Dividend (32)
Posted on May 8, 2008 1:40 PM
- Mortgage Early Payment Defaults Surge in 2008 (7)
Posted on November 4, 2008 12:32 PM
More on Wells Fargo
Wells Fargo recently received $25 billion from Treasury and are in the process of acquiring Wachovia and approximately $122 BILLION in Pay Option ARMs that comes with them. Tonight after close, Wells announced a common offering of $10 billion as reported by the Wall St Journal. Is the reason they didn’t take $20 billion is they couldn’t get that much and are going to come back later for more or they didn’t need it?
“Wells Fargo & Co. said it will offer $10 billion of common stock to the public.
As recently as a week ago, Wells Fargo said it would raise up to $20 billion, primarily through the sale of common stock, for its purchase of Wachovia Corp.
The bank declined further comment.
Wells Fargo last week also issued 25,000 preferred shares to the U.S. Treasury Department in exchange for $25 billion as part of the government’s plan to rescue large U.S. banks.”
Wachovia has a program to try and modify themselves out of much of their Pay Option portfolio but I have been told by participating mortgage bankers that the program is not going well.
Wachovia also has a (modification) program in place but theirs involves that you refi the loan off of their books. They will allot a certain amount of money to your case to buy down your principal and/or interest rate, but they force you to sign a silent second mortgage note for the injected amount called a ’spend’. This is a major problem with the program and is why I feel it will ultimately fail. Borrowers are not interested in staying over their heads in debt, which is what Wachovia’s plan essentially does. Once again, if you have a Wachovia loan then you know they want to deal so go for it. If you don’t feel comfortable get professional advise from a mortgage modification specialist:
Oct 8th, 2008
There are significant problems with The Spend, however. Most obviously, they are artificially supporting house prices by giving borrowers extremely low interest rates such as a 2% 30-year fixed and a zero interest rate second. In addition, what if values are not at the bottom? The ‘negative equity effect’ is real and if values continue to tumble what’s to say that the borrower will not just walk at a later date. A good number of these may even turn into rentals because with a 2% fixed and zero% second, the property may cash flow.
The thought process is that if the borrower can afford their payments, especially on a 30-year fixed, it does not matter what the value of the home does – they will stay and make their payments. Well, this has obviously been proven wrong, as we are seeing Prime and Jumbo Prime default in greater numbers as values fall. On the other hand with house prices down so far in the areas in which this program is going into effect, there is a much better chance that this fundamental will play out going forward.
But then there is still the silent second hanging over their head and the fact that home owner is underwater by that large of an amount. This makes borrower repayment patterns totally unpredictable across all paper grades. This also makes typically life circumstances such as job loss or illness almost a guaranteed default. If you have equity in your property, you have wiggle room.
One thing is for sure, The Spend is worlds better that the recent BofA/Countrywide settlement scam, in which the AG sold hundreds of thousands of borrowers down the river at a ridiculously low price. Remember gang, once you do something with respect to a mortgage modification or refinance, you lose your rights to come after the lender for predatory lending violations and forced rescission/modification.
11-5-08 MEREDITH WHITNEY CNBC INTERVIEW
Below is the loosely translated interview. – Click HERE for video.
Maria: What changes with an Obama Presidency for the banks?
Whitney: Financials and the economy are so far off the tracks its hard to see anything helping right now. One thing they talked about was mortgage modifications – trying to get money to consumer.
None of this makes banks have a higher appetite for risk so you don’t see a lot of money coming into system aside from govt subsidies. So the banks will make less if they modify your loan. They will be siting on sludgier assets. That doesn’t create new capital to get back into the system.
Higher taxes are assoc with Dem’s but there it less to tax…one good thing about all of this.
Maria: You were the first to point out the upset in financial industry – please tell us where we are in cycle?
Whitney: We are in a new part of cycle. We have digested the fact that the securitization is not coming back. Securitization made up 85% of mortgages and 50% of credit cards. Market is not coming back. Contraction of capital is one thing. But what happens going forward is contraction of the overall mortgage market – this has never happened before.
Banks are not lending. Originations are down big in q3. Loan balances getting smaller. Credit cards make up over $2 trillion in available credit lines being pulled out of system. Credit is being taken away form those that got credit in the past 15 years. Never in America had we seen this before. This is a more destructive market for consumer. This is not factored into market.
An economy that has already been impacted by market and unemployment going to double digit levels is another wild card for banks.
Banks just will not make a lot of money and the street is still expecting them to make a lot more money. My estimates are 30-70% below the street and i think I am too high.
Maria: 70% below the street – oh my. Its going to be tough to make those up – the street still expects them to make lot?
Whitney: Banks asset base gets smaller so revenue gets smaller. They can’t cut costs fast enough to keep up with declining revenue. Credit costs increase and you are running faster to collect on loans. So you just have a protracted period of negative operating leverage.
Many of the banks, especially the two brokers, expense structure grew so fast over the past several years that their expense structure is built for a 06-07 revenue environment and their revenue will be like 01-02 revenue environment.
Maria: How much of this is priced in how much will this be a surprise? stocks are down so significantly.
Whitney: Citi, UBS, Wells Fargo, JP Morgan and BofA at all these levels est are coming down dramatically. Nobody is immune. believe it or not, analysts think losses will be more milder than they really will be.
One difference between my est and the rest of the street has been a higher loss curve estimates for losses than others. But my loss estimates are actually lower than the reported numbers. I think we are in for a rude awakening. That may result in a slow grind down in these stocks.
I don’t think you will see massive capital destruction like we saw with huge write downs but I will bet a lot of money banks will come back for a lot more money on the next 9-months again so you will be diluted further. Now, from Obama you will see more regulation. They are a highly regulated utility with less dividend. Y should expect Citi and others to cut dividend.
Citi already cut but nobody is allowed to raise under TARP. But earns will be so much lower alot of companies will not be able to support dividends so yes they will cut again.
Maria: How significant of a fall will be see in these stocks?
Whitney: I think Citi goes to the single digits.
Maria: Who is best position and will go higher?
Whitney: There are many I like and I hope they can hold onto being independent, but stock prices are far too high.
I think you know JPM and BAC survives. There are alot of attractive companies.
Wells Fargo at $20 is attractive. They have a $20 billion offering in the works and that stock is still hovering near $30! That stock still has a ways down to go.
Wells Fargo is gonna be a great company and will be a survivor but consensus estiates are on Pluto. They will have a (equity) supply jam in terms of extra capital into the market and you will see a great chance to buy a great stock you want and much lower prices.
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