Meredith Whitney Speaks on Banks – “Wells Fargo $20 Per Share”!

Posted on November 5th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

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.

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:

Wachovia’s New Program – ‘The Spend’

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.


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.

More Mr Mortgage

26 Responses to “Meredith Whitney Speaks on Banks – “Wells Fargo $20 Per Share”!”

  1. My wife and I live in Oklahoma City area.
    She lost her job last Friday, Oct. 31.
    I just got a 60 day notice that my company,
    Trinity Industries, is permanently closing it’s
    Oklahoma City facility. So the house we just bought
    three years ago, even though it is the only payment
    we have, will likely be returned to the bank as there
    is a serious dearth of jobs in this area, and others
    are planning the closure of their business.
    We are not currently behind, but that will soon change.
    No modification will be able to help us.

    Welcome to the obama future.

  2. Hi Robert – help may be on the way.

    You can also call Green Credit – it is amazing what they are doing.

  3. MrM- what banks do you feel are ‘solid’. Of course, its all relative – but which ones have a lesser chance of imploding?

  4. dafox, the Government has clearly told you which 9 banks are too big to fail and so they won’t. No matter what it takes they will all survive short term (3-4 years anyway) until things straighten out. Once that happens then it will be a sudden turn of events where as everyone is on their own. No more bail outs and pay back what you owe. It is then that the chaos will start. You can kick the can down the road only so far, and you can bail out for only so long. At some point the chickens come home to roost and in 3-4 years (my estimate) they will be lined up in droves!!!

  5. Hey Robert-

    -Sorry to hear your news, but PLEASE don’t go and blame Obama for the last 8 years of the biggest housing ponzi scheme in history, when Bush fought against all regulations for banks and lenders!!! We simply cannot get worse stewardship of this country than we have had under BUSH, and now Obama gets to clean it all up….yep, isnt he lucky?!!

    Also, what are you doing buying a house if you are living so paycheck to paycheck?? That isnt Obama’s fault either, btw…no savings cushion with 2 people working means one thing– you were living beyond your means!

    The sad thing is, you didnt vote for him, but Obama will be the one protecting your interests as a citizen, especially now that you are joining the ranks of the unemployed.

    This is what happens when you have 8 years of no regulation, and a Red State Redneck with the IQ of a graham cracker for president.

    Actually, Obama is the one that will now likely be PROTECTING your interests, and

  6. I wonder who long it will be before WFC is that far down? The way the Fed Govt has protected these banks, they’re anything but transparent. If they have portfolio and HELOC defaults or non-performing that are bad enough, it will effect their income to the point where lay-offs will have to happen. I guess that may be the first sign.
    I’m starting to hear more stories of people getting laid-off and there are no jobs to be had….

  7. I did a lot right, but there comes a point…

    A year ago, a business I part-owned manufacturing consumer electronics in the US finally struggled to an end; assets sold for only enough to pay debts. I lost my income.

    I live on savings plus a little unemployment. I paid off my mortgage, back when others were putting their money into dot.stocks, and I live frugally.

    I’ve been building up a new entrepreneurial business. Now I’m at the point where I need a business loan to buy parts and pay for manufacturing (in China). That is, I do if there are going to be any buyers for my new product.

    I’m paralyzed, not knowing how hard I should even TRY in this climate. I could put my house up for grabs and see if I can get a loan on that. Then I can hold my breath and see if there’s an economy to sell into, or if I’ve just gambled my future away.

    Or I can wait and see how long I can live before my savings run out. I’m 55. Not exactly employable. Not old enough to retire.

    The reason I pulled out of stocks over 4 years ago was I KNEW the market never finished deflating from the dot.bust, and that stupid artificially low fed rate was distorting and “bubbling up” everything.

    Hey — this is Greenspan’s america.

  8. Hey David, I am not blaming anyone. I just said welcome to the obama future, knowing he will not be able to prevent any of this from happening.
    We were not living paycheck-topaycheck when we bought the house. Put 10% down, been paying extra every month. No credit cards, no car payments. But while everything around us keeps going up up and away, our pay has stayed rather stagnant. Now it will cease in it’s entirety.

  9. My wife and I live in Oklahoma City area.
    She lost her job last Friday, Oct. 31.
    I just got a 60 day notice that my company,
    Trinity Industries, is permanently closing it’s
    “Oklahoma City facility. So the house we just bought
    three years ago, even though it is the only payment
    we have, will likely be returned to the bank as there
    is a serious dearth of jobs in this area, and others
    are planning the closure of their business.
    We are not currently behind, but that will soon change.
    No modification will be able to help us.

    Welcome to the obama future.”

    Wow. He must be the Messiah if he did all that before even being elected.

  10. Robert,

    I’m sorry. I didn’t mean to come across as insensitive. It sounds like you were in the process of trying to keep yourself safe by accelerating the one payment you had. I hope things work out for you and your family.

    Regarding the Meredith Whitney article, I was so glad to find some updates on what was happening. There seemed to be so much increasingly positive sentiment after so much government support, I was wondering if this was our dead cat bounce.

    I’m also hazy on the status of CDSs. It seems we’ve been getting some “all is well” calls. Really?

  11. I used to compete against the WF correspondent division and was offered a regional sales job using the same matrix Mr. M. flashed in his video.

    The problem with matrices, is that lenders still only buy what they want. As a rep, you could have Tiers 1-8 on your matrix, but realistically you’re only going to get your bank to buy Tiers 1-3. There were lenders who did make all-in-bids with 10% due dilligence & many aren’t around today. Wells did a 100% due dilligence (as did we), so even if you bid on Tier 4-8 files, they were often rejected later in the DD process.

    Wells, JPM and Citi still have lots of home equity in their portfolios & this is a concern to all of us who are investors or employees. But to lead us to believe that WF built a toxic portfolio by buying everything to their matrix is patently untrue and is journalistic hype.

  12. Hey David

    You blame Bush for this mess YOUR WRONG. It is the democrat congress not Bush get it right. Your Obama wont do shit to stop the FREE FALL of mortgage values.

  13. Hey Bob,

    You’re wrong. Your post. (You are wrong, by the way.)

    Where are Thirdston’s Stayin’ Third lyrics?


  14. Paul

    Wells was pushing home equity lines for at least two years at the top of the bubble. With the fall in property values, these lines are no longer asset backed and are sucking a big pot of air. Something tells me that the next round of financing is going to be very expensive for Wells and while Meridith is calling for $20 a share, I think $10 is well within reason in current market conditions. Sacramento is just now exploring job cuts, 1 day off per month, 2 days less per year holiday pay, increased sales tax and increased unemployment insurance rates along with benefit cuts. California is going to sputter to a halt by March. Will be interesting to see what kind of Christmas they are factoring into revenues. My guess is that Christmas is going to be a lot worse for retailers than ever imagined.

    Our number one state employer, trade, is going to be hit hard in this global recession. California is going to be having an avalanche of pain hefted on it in 2009. Everyone is going to get hit with this one and Wells will not be immune, no matter how careful you think they were at any teir level.

  15. Bob,

    Do some real homework and try to make a point with something factual. Its more of a conversation that way.

    Blame for the vast majority of what’s wrong goes to those who deregulated the banks, which took place in a couple of major changes,most recen being in 2004. Greenspan cheerleading all the way. Likewise the Maestro blessed the use of Credit Default Swaps, assuring us all that they would act as a big buffer against risk.

    It’s the web of highly leveraged derivatives (CDOs CDSs, and their illegitimate children and grandchildren) that are creating the suction you hear whooshing through the world. The usual estimate is around 550 Trillion dollars worth. Much much bigger than the “real” economy.

    Deregulation: Instead of insulating mortgage lending banks from the dangerous practices of more adventurous financial instistutions, they have been allowed to infect one another; this is the wonderfulness of deregulation, as practiced by the finest RIGHTWING ideologues. (For you, Bob, that generally means Republicans.)

    I saw that stupid video blaming subprime loans on Bill Clinton too, for stuff going back to the 1970’s making it less legal to discriminate against people in poorer neighborhoods. This was twisted into a claim that banks were “forced to make subprime loans!” Which is sheer idiocy. All you have to do is visit the Wikipedia article it pretends proves its point, and you’ll see the actual picture is quite different from the silly “democrats did this to us!” blather.

    Guess what the $700 billion bailout has tucked into it for banks to play with.

    ZERO percent reserves. Really. So anyone want to try to figure out what THAT does?

  16. Thanks for that Mr M.

  17. Evelyn,
    Try to rein back that entrepreneurial enthusiasm . We are in new territory and the economics experts are having trouble divining this time. This is not a standard recession.

    Of the wall suggestion from an economist. Rent your house and go live somewhere cheap / American friendly / entrepreneurially active / not slammed by the commodities slump………. like the Philippines. Even countries in Africa , like Ghana. You also have the advantage of a much strong dollar.

    The one thing we do know is that this crisis is hitting the most developed countries far worse than many poorer those that did not push the boat out in the last ten years; eg some countries in in SE Asia after the 98 lesson of over-leveraged bust

  18. Wachovia buys Golden West/World savings.

    And goes BK.

    Wells Fargo buys Wachovia.


    A poison pill?

    I wouldn’t bet my future accounts with Wells that it wasn’t.

    Good work Mr. M. on this Wells thing.

    Notice when you log into your Wells online acct., there’s a front page message from the CEO – telling you not to worry?

    That’s precisely when the worrying (and action) begins.

    Good to see 321gold posting your stuff now too Mr. M. We’re all of similar mindset. The ‘throwbacks’ & ‘kooks’ weren’t all that far off the mark as once thought by the superior economic intellect of the (now defunct) Borrow & Spend crowd…

    Peace –


  19. CC

    Interesting, Wells has been pestering me to log on to the online account, must be so that I can read the not to worry message…..

  20. Bert, Wells has been pushing their new online security questions. You have to get them filled out or they cut off your online access.

    I like Wells, doesn’t mean I’m buying the stock but they have been my bank for twenty years and have always taken good care of me. I enjoy the low interest credit card — under 7%.

    Would not surprise me if they were hiding their losses though.

  21. Matt, exactly, under threat of losing online access, I have to log on and and read the presidents message so that they can tell me everything is OK. So if I do not log on and read the message are they going to close my account? I bet I will still be able to log on if I don’t a month from now and if worst comes to worst, I can get on the phone and answer a few security questions to get access returned.

  22. I bought my house in the Midwestern U.S. in May 2004. I paid $174,000 and I put 20% ($34,800) down. The mortgage balance was $139,200. I did some sort of WaMu pick a payment mortgage that I didn’t understand very well. I only paid the Minimum Amt. due every month.

    Today, my mortgage balace is $147,805. After almost 5 years of making payments, I owe $8,605 MORE. Aprantely, the i rate resets once per year but the i rate also resets on the principal balace every month.

    Now, this May, after 5 years of ownership, the minimum payment amount will disappear and the product reverts to full p + i over the remainder of the loan.

    I can’t afford this. The house next door has been for sale for 2.5 years and not one offer. The value of my house is definitely NOT what I paid for it almost 5 years ago either. Tax Assessor says it is woth $112,000. Personally I think it is woth $95,000 and rapidly declining due to the economy.

    I wrote several letters to WaMu asking for help. they don’t reply. They tell me I have to be behind in payments for them to help me. What do I do?

  23. G Cox,

    Thanks for the (rather radical) advice. I don’t think I’d fit in culturqally in Ghana or the Philipines. I’d be more likely to sell my California house and buy in a less expensive place like – Oh, Oregon. Not so third world, and I speak the language.

    I have a business partner who has invested a lot of his retirement money in our business; we have a warehouse full of our first product to sell. The next one is going to have to wait a bit, though.

    I’m adopting a cat from a couple who bought a bed&breakfast, and were about to sell their house (near mine) to get one near their new B&B. Then things fell apart, taking them by surprise. Rather than try to sell their house into the current market, they decided to rent it out. Their cat was camping out near the place, getting handouts from the renter, who is dreadfully allergic but kind. So I noticed and got in touch. This couple is living in a little one-room + kitchen apartment on a busy streetcorner. The cat was going nuts being cooped up vs being neglected on its old turf in the hills. I’ll be adopting the cat tomorrow. I asked if they wanted to eventually be reunited. She said she figured it would be at least 2 years before they’d have a home the cat could be ok in. She figures they’ll be doing the maid work themselves, and wondered, anxiously, if anyone will come to their new little B&B.

    I hope their renter doesn’t lose HER job. At least they didn’t rent out a house and move to Africa….

  24. Dick, If you can’t make the new payment like you say then it is pretty much out of your hands. If it were me I would do something insane like go to the teller window and say “I would like to make a mortgage payment” and hand the check to the teller made out to zero and explain that this is all I can afford this month. Hell if nothing else, at least they will remember you (that’s the guy)

    As I understand it, even a mortgage modification company can’t do much unless you are behind and the bank seemed to confirm that for you.

    Assuming that you are in a state where the loan is non recourse and you can walk, you might want to think about what the house is really worth and what the bank would have to do to make you stay. If the banks offer were to leave you with “but the house really isn’t worth that”, then chances are the deal is not good enough and would pretty much become their problem, not yours.

  25. I’ve been a WFC customer for 20 years. They are always trying to nickel and dime me with fees and charges, etc…it’s a big part of their revenue strategy. I use them a lot and keep a chunk of change with them. So everyone once in a while I have to have a “come to jesus” meeting with them to stop trying to hit me with every fee known to man,and a few they make up. I threated to leave and they retract the fees. It’s annoying, but they have good service. I’ve also caught at least one or two charges to my credit cards every year for years now and it’s ALWAYS in their favor. Cant trust anyone.

  26. Robert,

    What did Obama have to do with your plight?


    The manipulating of the CPI and Unemployment numbers started with JFK.

    Not paying our way started with LBJ.

    The situation we are in has been building for over 40 years. Yes, major causes happened in 1999 and afterward, but both republicrates and democans have been part of the problem.

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