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Why We Downgraded Wells Fargo and Big Banks Love Delay

rcwhalen's picture




 

We put out a research note earlier this week downgrading Wells Fargo & Co ("WFC"/Q3 2010 Bank Stress Rating: "B").  Of course the media focused on the departure of Howard Atkins, the former CFO who retired suddenly and without notice, but ignored the disclosure and governance issues.  Click here to see the Bloomberg TV hit yesterday.

I don't really care about the personal issues.  I do want to know, however, why Atkins cannot sign the 2010 financials.  Points:

1) O&Ds of bank holding companies have much higher standards of care than even public co directors under SOX.  Departure of Atkins requires an explanation. WFC needs to produce Mr Atkins so that he can tell us why he is unable to attest to the 2010 financials.  WFC's explanation is completely inadequate and begs the question.

2) The attestation to regulators is more of an issue than SEC disclosuure.  Remember, SOX is a watered down version of bank govrnance rules c/o COSO. Being a bank officer or director is a very high risk gig in terms of personal liability. Even as he leaves, a tail of potential liability follows Atkins and all bank O&Ds. For investors and regulators, having a new CFO sign the 2010 financials is useless.

3) More generally, WFC's public disclosure is abysmal and does not include many of the data points on losses, reserves, etc. that C, JPM and BAC consider to be "material" to investors.  Can't wait to read the 10-K, which will hopefully be timely filed.

But here are the last three graphs of our note for your consideration:

"Remember, for WFC and BAC, each day that goes by is about extend and pretend.  And also keep in mind that every time a state AG starts an investigation into foreclosure fraud or a state court judge refuses to move forward with a foreclosure, the managers at WFC, BAC and the other large banks are filled with joy.  Delay is the name of the game, both in terms of actually realizing losses and also disclosure of same.

In this regard, the court decision yesterday regarding Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, is actually good news for WFC and BAC.  Why?  Because it allows these banks to further extend the time when they must confess to investors and the markets the true scope of the losses facing them in retained consumer and commercial portfolios.  In this regard, read yesterday’s comment in Reuters, “Revolution, reform and the law of unintended consequences,” where we talk about the impact of the 2005 bankruptcy reform legislation on home foreclosures.

While the growing backlog in the courts will eventually cause banks significant additional credit losses, for now the national outcry over home foreclosures actually serves the interests of the banks and especially WFC. The problems that we believe are currently being obscured by inadequate disclosure by WFC, BAC and many other banks will only slowly emerge over the next three to five years, unless the SEC and federal bank regulators bring an end this charade and force WFC to come clean now."

Remember, delay = bliss.

Chris

 

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Fri, 02/18/2011 - 08:57 | 973576 Ted K
Ted K's picture

I think Chris Whalen is basically a decent guy.  But.... he reminds me a little of certain "editors" at the NYT (think initials A.R.S.) who are way too close to the investment bank industry.  Where was Whalen in mid--2008 before the crash???  Does he really think shitty balance sheets and shitty accounting at banks is a "newsflash" in 2011??  Sorry Mr. Whalen, if you're expecting a door prize for joining the boisterous crowd, those door prizes ran out about 2 and a half years ago. 

And by the way, shooting a flare gun into the air on municipal tax revenues around the same time "said person" has another book to sell, for those of us not born yesterday, doesn't count for much either.

 

Thu, 02/17/2011 - 18:50 | 972077 disabledvet
disabledvet's picture

Oil will now force them back into the hands of the Federal Government.  The whole thing....BECAME a complete disaster once the road to prosperity became throwing the entire United States Military under the bus knowing full well without them not a single drop of oil would come to the United States.  Better become Indian Joe and Indian Joe quick because this Cuckoo's Nest is live and on TV just SCREAMING with the worst class of so called "good people" we have ever known in the history of our Republic.  Indeed does a day not go by when we realize the vast majority of them in fact are a direct threat to not only our freedoms and way of life but of our system of government as well?

Thu, 02/17/2011 - 14:01 | 970804 AccreditedEYE
AccreditedEYE's picture

Chris, I'm a huge fan. Thanks for the story and thanks for doing what you do. Keep up the good fight. Keep exposing these traitors who keep confusing our current multinational corp./Banking Cartel form of quasi-government with the real, red-blooded capitalism and democracy we once had. Keep yelling at them that they CAN'T take RISK out of REWARD without breaking the system. You are the man... that is all. :)  

Thu, 02/17/2011 - 13:01 | 970526 I think I need ...
I think I need to buy a gun's picture

Enough of this shit....i want to plan my life for 2 years out I have no fuckin idea what this country is going to look like in 2 years so I'll just keep stacking instead of reinvesting in my business.....

Thu, 02/17/2011 - 12:34 | 970374 fuu
fuu's picture

Careful Chris, you could be swimming with Uncle Warren's fish.

Thu, 02/17/2011 - 11:51 | 970190 PulauHantu29
PulauHantu29's picture

Another Wells Fargo Dwongrade?

Must be Karma.

Thu, 02/17/2011 - 11:24 | 970097 c-rev with a twist
c-rev with a twist's picture

I like Chris Whalen.  The problem is that our 'regulators' (quotes added for emphasis) are way behind the curve, so his 3-5 year time frame is probably right on the money.

Thu, 02/17/2011 - 11:20 | 970086 Stone Street Ad...
Stone Street Advisors's picture

Nice work. Similar to what we suggested in our piece several days ago.

http://stonestreetadvisors.com/2011/02/10/why-the-wells-fargo-cfo-quit-and-pick-a-pay-games/

Thu, 02/17/2011 - 11:14 | 970065 Thorny Xi
Thorny Xi's picture

Free houses for everyone.  That's rich.  The houses will revert to former owners or builders, Loans will remain in place, unsecured.  Deadbeats will be shot, eventually.  Deadbeats will always be the minority, remember.  Stop your crowing.

Thu, 02/17/2011 - 11:10 | 970045 falak pema
falak pema's picture

If you delay too long the angle of the dangle can become dismal.

Thu, 02/17/2011 - 10:55 | 969994 Fearless Rick
Fearless Rick's picture

I'm all for the banks loving delay. Just push it back, back, back, and I won't pay, won't pay, won't pay.

Free houses for everyone!

Thu, 02/17/2011 - 10:36 | 969906 falak pema
falak pema's picture

meredith whitney is gun powder for red blooded barrels.

Thu, 02/17/2011 - 12:09 | 970251 Zero Govt
Zero Govt's picture

how can Meredith, investors or shareholders do their jobs when the figures are made of fudge 

Thu, 02/17/2011 - 10:30 | 969883 Murchadh
Murchadh's picture

This guy is a doucheb@g. I've seen some of his presentations and his nos are poor. One presentation confused interest income with net interest income. This guy is pretty much in line with Meredith Whitney, made one good call and has been wrong ever since. Now he has to resort to posting on zerohedge to get attention. Another one of these "celebrity" bears who crave publicity.

Thu, 02/17/2011 - 10:54 | 969985 Fearless Rick
Fearless Rick's picture

Yeah, Murch, you know better than Chris Whalen. That's fucking rich, you ass-wipe. Mr. Whalen doesn't need any publicity, jerk-wad. He posts here because it's a good place to get the story out.

Come back when you have something constructive to add. troll.

Thu, 02/17/2011 - 11:10 | 970043 Murchadh
Murchadh's picture

"Come back when you have something constructive to add". Sure that's good coming from you. I supply numbers and facts to highlight why the guy is a waste of space and you have to resort to name calling. I probably should have realised he'd have a couple of bum chums on this site to offer him support. Did you write that post when he had you bent over your desktop?

Thu, 02/17/2011 - 10:34 | 969896 snowball777
snowball777's picture

Be still, Stumpf.

Thu, 02/17/2011 - 10:41 | 969930 Murchadh
Murchadh's picture

Ha just pointing out that this guy doesn't deserve much attention. You can make the argument about any bank having a lack of transparency given the size of balance sheets but given loans are c.60% of assets at WFC vs. 34% at citi which is loaded up on "trading account assets" and "investments", i think u can make the argument transparency at C is much lower. This guy is just getting some easy headlines because of a poorly explained CFO departure.

Thu, 02/17/2011 - 10:27 | 969872 falak pema
falak pema's picture

Buffet never buys duds right? Unless he's doing a quick double take...

Thu, 02/17/2011 - 10:18 | 969839 Dadoomsayer
Dadoomsayer's picture

Is Buffett a major shareholder?  Yes...

Can this company be touched?  No

Nuff said.

Thu, 02/17/2011 - 09:54 | 969754 falak pema
falak pema's picture

Rumor has it that this bank...I may be wrong on the specific US bank... is long 50 billion on real estate/commodities in emerging markets through cross over trading with German and Hong kong/Taiwanese financial institutions, some awesome hedge funds, that have sold their shirts naked on commodities derivatives as well. The ripple effect of a down turn could be awful for all in this incestuous money supply chain. All it'll take is the mesh of inflation hitting big on chinese/far east market...bang...This is in addition to potential exposure in the US real estate market. Is this the current state of affairs of other TBTF US banks?

Thu, 02/17/2011 - 10:24 | 969863 snowball777
snowball777's picture

kindling: noun

easily combustible material for starting a fire

Thu, 02/17/2011 - 09:53 | 969751 Apart from Reality
Apart from Reality's picture

"unless the SEC and federal bank regulators bring an end this charade and force WFC to come clean now."

Don't hold your breath, Chris.

Thu, 02/17/2011 - 13:04 | 970542 I think I need ...
I think I need to buy a gun's picture

is this presidents day weekend? i smell a bank holiday or gold revaluation? G-20 meeting?

Thu, 02/17/2011 - 11:45 | 970095 Zero Govt
Zero Govt's picture

SEC do their job, enforce the rules ha ha .....this is a protecting racket, a 'Don't Rock the Banana Republic Boat' cushy little Govt job..... run the small fry out of business not the Big Boy members of Club Parasite....  State-Banking-SEC lawlessness, obstruction and anarchy to continue ...until it can't!   

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