The economic bloggers of the world are digging into Wells Fargo's books, and they are finding a very foul odor.
#1) Market-ticker posted this little item, with the supporting document, that should make for interesting reading.
This borrower couldn't pay and thus stopped doing so. This should generate a "NOD" (Notice of Default) and ultimately lead to foreclosure, right? It should result in an impaired asset which might be sold to some other company (at a discount), right?
It got sold all right - right at the "120 day" late point where Wells counts a loan as "defaulted."
But look at who it got sold to.....
Yes, Wells bought the loan from.... itself?
It's a classic shell game. Wells Fargo can avoid generating a NOD and go to foreclosure and thus book losses, but the losses are still real.
#2) The Bank Implode-O-Meter investigations of Wells Fargo turned up this interesting factoid.
In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.
Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.
According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large.
Keep in mind, should the junior tranches eventually default, then the bank is on the hook.
Wachovia had $230 Billion in commercial loans when they were taken over by Wells Fargo. That portfolio is now defaulting at a rate 8 times greater than industry average.