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Why the Wells Fargo CFO Quit and other Pick-A-Pay Games People Play
This story previously appeard on the Stone Street Advisors website.
What, exactly, would cause a highly paid executive to abruptly quit his job? The executive in question is Howard Atkins, former CFO of Wells Fargo (NYSE: WFC). In 2009, Mr. Atkins' total compensation was $11.6 million. That was up from $4.9 million in 2009 and $5.7 million 2007 – that’s not bad living by any standard.
I believe the Wells does not receive the same level of scrutiny that its peers receive. This is likely due to the fact that Berkshire Hathaway (NYSE: BRK.A) is their largest shareholder. As many of you know, investment banking is driven largely by fees received from capital raising and Mergers & Acquisitions. Buffett’s empire of portfolio companies crosses numerous sectors. Those companies, from time to time, find it necessary to utilize the services investment banks. Those services typically result in hefty fees. Why upset uncle Warren? Just a thought, but I like conspiracy theories.
Back to the topic at hand. Why would a 59 year old man (he turns 60 this week), making north of $10 million, quit with no stated future plan? The folks over at The Street.com say it was for “personal” reasons. I will let them speculate on what those reasons may or may not be. I would rather take a look at some numbers. As I suggested in an earlier post, the Wells Fargo numbers look suspect when compared to its universal banking peers. I won’t rehash the comparison here, rather, I plan to focus on a “then and now” review of the “toxic” assets the company acquired when it took over Wachovia back in the dark days of 2008.
In particular, let's focus on the pesky loans the bank picked up from Golden West by way of its acquisition of Wachovia. When I think of Golden West, I am reminded of Countrywide Financial. You may recall Bank of America acquired Countrywide for $4 billion and has subsequently taken charges of more than $8 billion related to that gem. I digress.
On page 11 of the Wells Fargo/Wachovia merger presentation, management indicates that the Pick-A-Pay mortgages would have lifetime losses of $32 billion on a book or $122 billion, or a 26% loss. The net result leaves $90 billion of Pick-A-Pay loans (pro forma at 6/30/08), the most toxic of mortgages, on the company’s books. Many bulls point to this "mark down" as the reason Wells is able to report better than industry averages on their loan portfolio. The devil is in the details. Have you ever danced with the devil by the pale moonlight?
Fast forward to the most recent quarterly release. The Pick-A-Pay assets are currently on the books for $74.8 billion. The presentation proudly states that the portfolio is performing “better than expected.” Upon closer inspection, it becomes clear that the outperformance was manufactured. To wit: on page 34 of the presentation, it states that the “carrying value of $74.8 billion in first lien loans…[is] down $20.5 billion from 4Q08 on paid-in-full loans and loss mitigation efforts.” On page 21 of the presentation, management tells us that the Pick-A-Pay portfolio is performing $2.4 billion better than expected. Remember that number.
Peeling back the onion further reveals that there was fully $3.7 billion (page 34) in modification principal “forgiveness.” It further states that the “modification redefault rate has been consistently better than the industry average as [the company has] strived to give customers an affordable, sustainable payment.” Without these modifications, it appears that the $2.4 billion outperformance would have been $1.3 billion underperformance. But wait, there’s more!
Of the Pick-A-Pay mortgages that were deemed “Purchase Credit Impaired” or “PCI,” only 62% of the portfolio was “current.” Deeper in the presentation (page 30, to be exact) we find out that 81% of the Pick-A-Pay nonaccruals are held at “recoverable value.” The remaining 19% have “not yet been written down.” On that same slide (page 38) we find out that charge-offs to date are equal to 28% of the original balance. Recall, at the time of the acquisition, the estimated losses were 26%. Add to that, 35% of the mortgages have loan-to-values of ≥80%. I believe it has been well documented that house prices remain depressed and are well below their 2008 levels. Yet, management still makes the representation that the loans are performing “better” than expected. As Chris Berman says: c’mon man!
A conservative stance would be to write at least some of these “assets” down to reflect the reality that the loans won’t be repaid in full, if at all. Wells reported $126.4 billion equity ($90.9 million of tangible equity) at year end; $4.1 billion in non-accrual loans is not going to bring down the house by itself. However, I have only examined $74.8 billion – or approximately 10% - of a $757.3 billion loan book. This begs the question as to where else has management taken liberties to make their loan book look healthier? I believe it is about time for management to take a good hard look at the loan book and stop marking to myth.
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pump it and dump it ....Mr Atkins is off before the pump packs up
Guess it is not going to change. Same old crap, day in and day out. Who the hell buys bank stocks?
Brian Sack.
You're reading way too much into this. I worked at WFC for 8 years, and the priamry reason senior people get canned is either they were harassing their secretary or their boss didn't like them and found a convenient excuse to push them under the bus. I got hauled into my bosses office for saying to an intern that "she'd look nice in a dress. I could have been fired if it happened twice. Big banks are very p.c.
boy is that the truth. All my friends that went into banking are so paranoid and careful around the office. I am glad I still work in a backwards free-wheeling area where intern seduction is still a perk. Once I became too old for the game I would often research what the "going rate" would be. The numbers were surprisingly low. One guy caught the clap from a lower level employee and announced it in morning meeting because he needed an antibiotic! He was an old ugly fat fart and also told everyone what he paid her! Yes everything you see on scrubs and all the stories about hospitals and broom closets and call rooms are true. I feel sorry for people in the corporate culture. I wouldn't have lasted six months. It is scary PC.
If I were a 59 year old making north of $10M per year, I would get out while the getting was good, but that's just me.
Spoken like someone who isn't a money junkie like Atkins.
On April 9, 2009, FASB issued the official update to FAS 157[20] that eases the mark-to-market rules when the market is unsteady or inactive. Early adopters were allowed to apply the ruling as of March 15, 2009, and the rest as of June 15, 2009. It was anticipated that these changes could significantly boost banks' statements of earnings and allow them to defer reporting losses.[21] The changes, however, affected accounting standards applicable to a broad range of derivatives, not just banks holding mortgage-backed securities.
I do a lot of Broker Price Opinions for banks on residential properties in Vegas, and lately have been doing a lot of WFC properties that were foreclosed on in 2008 and turned into rentals. Now these properties are finally being put on the market as REO's.
Of course the values have declined significantly since 2008 and the losses are much greater now than if they had just sold them at the time they foreclosed. I wonder how they were carried on the books during the time they were rented out? Probably as good loans.
Not that this would be the reason the CFO left, but just another example of how the banks took a bad situation and made it worse, and no doubt hid the losses off balance sheet.
It's getting harder and harder to pretend that nonperfoming loans have [mythical] value. This may be the point where some institution's lies start to unravel.
Is it mere coincidence that RK Arnold of MERS infamy and a COO of Freddie Mac resigned within past 30 days. Freddie COO with unpaid leave effective immediately also, just like WFB CFO.
no. rat exodus.
Survival is always a health issue. That's why rats jump from sinking ships.
Probably true that WFC's books are rife with fraud but who gives a shit about that? The big banks aren't going down no matter how insolvent. TPTB don't play that homey. This is why the big banks have been a buy and will remain a buy. Not with my money though, I'll buy a tobacco stock without any remorse but I can't in good conscience own a TBTF bank.
Probably just a health issue, he's 59 and he's in a super high-stress field.
There is only so much shit you can bury on the farm.
oldie but goodie on Wells' Pick-a-payment book:
http://healdsburgbubble.blogspot.com/2009/05/reset-chart-from-credit-suisse-has.html
There's corn in unicorn. Is it genetically modified? Like the numbers of Sadler's Wells Fargo carrying fake cargo?
maybe mister atkins said i'm too old for this shit. seeeeee ya.
"Mark to unicorn" accounting will continue and until the unicorns come home.
Hedge accordingly
Predictably, payers primarily picked "no pay."
More like this dance:
http://www.youtube.com/watch?v=9E4wuU6twJc&NR=1&feature=fvwp
Amusing: We have followed Atkins for years. In our opinion, he was one of Wall Street's greatest "snake oil salesmen." We have always wondered why it took the street (and board) so long to push him out. The Golden West deal was almost as bad as BAC's Countrywide deal. Both were absolutely disasterous for both of these banks and came at the peak of the mortgage market (morons). WFC's Stumpf is no better either (a Ken Lewis clone).