Well, Wells Fargo is far gone
Three years into the Greek crisis and big things are finally happening this week. Well something is going on and anyone who claims to know more than that really doesn’t.
There is a big piece of Greek paper coming due in March and the Germans don’t want to pay par but they also don’t want a default. They also want the world to keep lending other European countries money so their major financial institutions like Deutsche Bank can stay solvent.
There is nothing simple about how the next two months will play out. Just wait till the shadowy industry body that rules credit default swaps starts ruling what’s a default and what’s not.
But just in time for Valentine’s Day our banks got a huge gift from the feds, which might as well have come with roses and frilly lingerie. That mortgage settlement we talked about last week went through. After closing out our Bank of New York short I’m doing the same with our Wells Fargo position.
The multistate mortgage settlement now includes California, which lets banks off the hook for the bargain basement price of $25 billion. Considering that four of them (Citi, BofA, JPM & Wells Fargo) have a combined market cap of $490 billion and one is still <70% owned by the feds (Ally), this is really pathetic.
California is the country’s largest housing market and that is where Wells Fargo is the most vulnerable. Not only is a good piece of their own loan book from California but their Wachovia acquisition contained the remnants of that bank’s undigested Golden West purchase, which is subprime-a-plenty. And California’s AG negotiated a guaranteed $12 billion dollar chunk for her state, meaning that Wells Fargo is the largest direct recipient of this corporate-forgiveness boondoggle. Inland empire real estate may take a long time to recover but Wells Fargo can take a charge-off and start putting the putback mess behind it this quarter. This settlement is a veritable Get-Out-Of-Jail-Free and Beauty-Contest card all in one. Hasbro should really look into a bank themed Monopoly edition.
I’ve counted about five state attorneys general talking about the mortgage settlement as a wonderful “first step”. For a crisis that is now in its sixth year. And any coincidence this is an election year? When there is a federally sanctioned congratulations party you don’t want to be the person in the corner skulking and pointing out that the catering stinks
What I think is going on is that WFC is benefiting from a sounding chamber. Venerable shareholders like Warren Buffett say that Wells is exceptionally well managed, analysts find reasons to portray loan losses as superior to rest of the money center banks, and the retail investor sees it as separate from the Citi’s & BofA’s. The market is giving Wells Fargo more credit than I believe it deserves — and we’re not going to fight it anymore. You don’t get any extra credit for being early on a call.
And I groan closing this short because it is right at the moment they are diving into investment banking. Retail banks have a pretty bad history when they try to shape shift into Gordon gecko deal makers. But all that doesn’t matter. We don’t look to be stubborn because we think we are right. The point is to make money, and adjust the portfolio accordingly.
As a short position runs against you, it gets to be a bigger and bigger part of your portfolio. With the removal of WFC we’ll have some cash that we can put to better use, and we’ll use it to gain exposure to tech names that should be two or three baggers over the next couple of years.
Tech names like Fusion-io Inc. I want to be a buyer on down days, after bad earnings reports that have more to do with temporary macro-slowdowns an growing pains than a fundamental shift in the story.
