Last week Wells Fargo announced record earnings for the first quarter of 2009. The stock market soared on the news, and reports started to circulate that the worst was over for this recession.
No so fast!
Wells Fargo’s results were driven by fees from a wave of refinancing. The refi boom came about because the Fed has dropped interest rates to the floor. Mortgage rates have followed. As a result, people who could have been refinancing existing mortgages to take advantage of the lower rates.
Everyone who refinances has to pay fees to the bank for handling the transaction. This is great for the bank, but it is a short term phenomena. Mortgage rates are sitting at about 4.5% right now. They aren’t going to go much lower, if any. We’ve got about one quarter more of refinancing, then everyone who wants to take advantage of the new lower rates will have done so, and the fee income is going to dry up again.
The real issue is whether Wells Fargo has finished writing off all the bad loans in their real estate portfolio. Since real estate prices are continuing to fall, I’m guessing that more bad news is going to come out. After all, WF posted a loss in the 4th quarter of last year almost equal to what they earned this quarter.
We’re not out of the woods yet.
Showing posts with label banking. Show all posts
Showing posts with label banking. Show all posts
Monday, April 13, 2009
Tuesday, March 24, 2009
Take this TARP...Part II
Goldman Sachs, the big Wall Street investment bank, recently announced that they were going to try and repay their share of the Federal TARP bailout money ahead of schedule. The previously announced plan was to repay the Treasury by the end of this year. They have now said they could pay back the government as early as the end of April.
I can’t help thinking this is partially due to the furor over the AIG bonuses. Watching the AIG financial traders get used as a metaphorical piñata by the politicians and media has got to be a powerful spur to get out from under the Federal thumb. Who can blame them: would you want to have to answer to Barney Franks?
As in the case of Northern Trust, I think much of the political grandstanding over the AIG bonuses was overwrought and silly. But I also think that the sooner the government gets out of the ownership of financial institutions, the better for the country. So if the posturing and outrage spurs the managers of companies to put their houses in order and regain their independence, in the long run we will be better for it.
It is an ill wind that blows no good.
I can’t help thinking this is partially due to the furor over the AIG bonuses. Watching the AIG financial traders get used as a metaphorical piñata by the politicians and media has got to be a powerful spur to get out from under the Federal thumb. Who can blame them: would you want to have to answer to Barney Franks?
As in the case of Northern Trust, I think much of the political grandstanding over the AIG bonuses was overwrought and silly. But I also think that the sooner the government gets out of the ownership of financial institutions, the better for the country. So if the posturing and outrage spurs the managers of companies to put their houses in order and regain their independence, in the long run we will be better for it.
It is an ill wind that blows no good.
Tuesday, March 10, 2009
We Bring Good Things to Light?
GE stock has fallen precipitously in value over the last year. It was trading at a little over $6 per share last week, having come down from a high of $40+ in 2007. This is the same GE that builds both jet engines and refrigerators, light bulbs and MRI scanners. GE even owns NBC and Universal Studios. They are a leader in globalization, noted for having a deep management bench and the ability to develop talent. GE is one of the few American companies with AAA bond rating. The bluest of the blue chips.
And yet, panic selling drove the price down 45% in one month. This, despite the fact that the company was profitable last year. What gives?
The problem is that GE has xx in assets, but has yy in liabilities. If GE has problems paying back those liabilities, that spells real trouble for the stockholders. In corporate finance, the owners of the liabilities (bondholders) always get paid before the owners of the equity (stockholders). The reason the stock price has fallen so far is that the judgement of the market is that GE’s liabilities won’t be paid back.
You may think “What’s the problem? They’ve got a lot more assets than liabilities.” Well, maybe yes, and maybe no.
GE is really two companies. There is General Electric, which is the collection of industrial businesses that makes all the stuff. They have twice as many assets as liabilities. Then there is GE Capital. GE Capital provided half of GE’s profits for 2007. The problems are in GE Capital portfolio. In the 2007 annual report, GE Capital had $646 billion in assets, and $587 billion in liabilities. If the assets are worth only 10% less than what GE said they were worth a year ago, that would be enough of a fall in value to wipe out GE Capital’s equity, forcing the company to put more cash into the business.
GE Capital uses the AAA rating to borrow money cheaply. They then use that money to make loans. A lot of the loans are equipment leases. You want to lease a jet engine or MRI scanner, GE Capital will help you do that. But they make a lot of other types of loans as well. For a financing company, the money borrowed is a liability, and the loans made are the assets.
The market is concerned about writedowns hidden in the loan portfolio. Another way of saying that is that the assets are worth a lot less than what GE has been saying, and GE will have to ‘fess up soon.
I decided to go looking through the annual report to see if I could spot any potential problems. In corporate annual reports, the pesky details that can cause trouble are usually buried in the notes that follow the financial statements at the back of the report. Opening up the report almost at random, I found Note 12: GECS Financing Receivables.
Inside Note 12 was a line item for a division called GE Money, listing Non-US Residential Mortgages: $73.759 billion. So GE owns a mortgage company that is holding almost $74 billion in mortgages. I’m guessing that most of the mortgages are in the UK.
Attached to the line items was a reference to subnote (A). In little, tiny print, subnote (A) included the following statement: “approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization.”
Yikes. Let me translate that for you: “GE holds over $19 billion dollars of toxic subprime mortgages in a collapsing real estate market.” After those UK homeowners stop paying, GE will foreclose, and then sell the houses for half. My back of the envelope calculation is that GE will have to write down that sliver of their portfolio by about $10 billion dollars. The total reserve for losses in their Financing Receivables is only $4.3 billion.
GE recently eliminated 70% of their dividend. This contributed mightily to the free fall in the stock price, but it will free up $9 billion a year in cash to apply to other uses, like writing off foreclosed mortgages. I have a feeling that they are going to need the cash.
The 2008 annual report is due any day now. I can’t wait to read it.
And yet, panic selling drove the price down 45% in one month. This, despite the fact that the company was profitable last year. What gives?
The problem is that GE has xx in assets, but has yy in liabilities. If GE has problems paying back those liabilities, that spells real trouble for the stockholders. In corporate finance, the owners of the liabilities (bondholders) always get paid before the owners of the equity (stockholders). The reason the stock price has fallen so far is that the judgement of the market is that GE’s liabilities won’t be paid back.
You may think “What’s the problem? They’ve got a lot more assets than liabilities.” Well, maybe yes, and maybe no.
GE is really two companies. There is General Electric, which is the collection of industrial businesses that makes all the stuff. They have twice as many assets as liabilities. Then there is GE Capital. GE Capital provided half of GE’s profits for 2007. The problems are in GE Capital portfolio. In the 2007 annual report, GE Capital had $646 billion in assets, and $587 billion in liabilities. If the assets are worth only 10% less than what GE said they were worth a year ago, that would be enough of a fall in value to wipe out GE Capital’s equity, forcing the company to put more cash into the business.
GE Capital uses the AAA rating to borrow money cheaply. They then use that money to make loans. A lot of the loans are equipment leases. You want to lease a jet engine or MRI scanner, GE Capital will help you do that. But they make a lot of other types of loans as well. For a financing company, the money borrowed is a liability, and the loans made are the assets.
The market is concerned about writedowns hidden in the loan portfolio. Another way of saying that is that the assets are worth a lot less than what GE has been saying, and GE will have to ‘fess up soon.
I decided to go looking through the annual report to see if I could spot any potential problems. In corporate annual reports, the pesky details that can cause trouble are usually buried in the notes that follow the financial statements at the back of the report. Opening up the report almost at random, I found Note 12: GECS Financing Receivables.
Inside Note 12 was a line item for a division called GE Money, listing Non-US Residential Mortgages: $73.759 billion. So GE owns a mortgage company that is holding almost $74 billion in mortgages. I’m guessing that most of the mortgages are in the UK.
Attached to the line items was a reference to subnote (A). In little, tiny print, subnote (A) included the following statement: “approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization.”
Yikes. Let me translate that for you: “GE holds over $19 billion dollars of toxic subprime mortgages in a collapsing real estate market.” After those UK homeowners stop paying, GE will foreclose, and then sell the houses for half. My back of the envelope calculation is that GE will have to write down that sliver of their portfolio by about $10 billion dollars. The total reserve for losses in their Financing Receivables is only $4.3 billion.
GE recently eliminated 70% of their dividend. This contributed mightily to the free fall in the stock price, but it will free up $9 billion a year in cash to apply to other uses, like writing off foreclosed mortgages. I have a feeling that they are going to need the cash.
The 2008 annual report is due any day now. I can’t wait to read it.
Monday, March 2, 2009
Northern Trust: "Take this TARP and Shove It..."
Two weekends ago Northern Trust sponsored a PGA tournament in LA. As part of their sponsorship, they flew hundreds of their clients and employees out to California for the event. Northern Trust’s guests were put up in fancy hotels, and treated to several parties, with big name entertainment such as the bands Chicago, Earth Wind, and Fire, and Sheryl Crow.
When news of this sponsorship broke, Congressman Barney Frank fired off an outraged letter, demanding that Northern Trust pay the Treasury back the amount that they spent on this event. His position was that since the bank had not refused Federal TARP money last year, it "demonstrates extraordinary levels of irresponsibility and arrogance" for the bank to spend money marketing to it’s clients in a way that Barney Frank disapproved of.
Last week Northern Trust defended itself by pointing out that it was profitable, and that it was funding a marketing plan out of those profits, not out of the TARP bailout money. They also pointed out that the Federal money was actually a loan, and that they had made the interest payments back to the Treasury on time.
Now the other shoe has dropped. This weekend Northern Trust announced that it would be returning the $1.6 billion given to it by the Treasury as soon as possible. In essence, they have told the Federal government “You can take your unsolicited bailout money, and your unsolicited advice on how we should run our business, and put them both where the sun don’t shine!”
Northern Trust does most of its business with institutions and high net worth individuals (AKA rich folks). Thy put the trust in trust funds. The execs at NT must have figured that if they went with the sackcloth and ashes marketing advocated by the new Puritans in Congress and the media, they stood to lose a lot of business. As long as they had the Federal money on their books, they were going to continue being attacked for following a strategy that has made them one of the banks that don’t need a bailout. So to preserve their successful business model, they decided to return the money.
One question pops up for me. Just how much money do you have to have in a bank to get treated like a Northern Trust client? I keep what I consider a fair chunk of money on deposit at my bank, and I don’t get freebies like getting flown out to a California golf tournament, and being put up at the Ritz Carleton. My bank won’t even give me a coupon for the get away weekend at the local Red Roof Inn.
Or how about the Sheryl Crow concert? Shoot, I’d be happy with a Sheryl Crow CD! No, the only freebie I’ve gotten from my bank was a pad of Post-it notes, and I had to distract the banker to get those (“Look, it’s Hailey’s comet!” Point with the left hand, snatch with the right).
When I grow up, I want to be a Northern Trust client.
When news of this sponsorship broke, Congressman Barney Frank fired off an outraged letter, demanding that Northern Trust pay the Treasury back the amount that they spent on this event. His position was that since the bank had not refused Federal TARP money last year, it "demonstrates extraordinary levels of irresponsibility and arrogance" for the bank to spend money marketing to it’s clients in a way that Barney Frank disapproved of.
Last week Northern Trust defended itself by pointing out that it was profitable, and that it was funding a marketing plan out of those profits, not out of the TARP bailout money. They also pointed out that the Federal money was actually a loan, and that they had made the interest payments back to the Treasury on time.
Now the other shoe has dropped. This weekend Northern Trust announced that it would be returning the $1.6 billion given to it by the Treasury as soon as possible. In essence, they have told the Federal government “You can take your unsolicited bailout money, and your unsolicited advice on how we should run our business, and put them both where the sun don’t shine!”
Northern Trust does most of its business with institutions and high net worth individuals (AKA rich folks). Thy put the trust in trust funds. The execs at NT must have figured that if they went with the sackcloth and ashes marketing advocated by the new Puritans in Congress and the media, they stood to lose a lot of business. As long as they had the Federal money on their books, they were going to continue being attacked for following a strategy that has made them one of the banks that don’t need a bailout. So to preserve their successful business model, they decided to return the money.
One question pops up for me. Just how much money do you have to have in a bank to get treated like a Northern Trust client? I keep what I consider a fair chunk of money on deposit at my bank, and I don’t get freebies like getting flown out to a California golf tournament, and being put up at the Ritz Carleton. My bank won’t even give me a coupon for the get away weekend at the local Red Roof Inn.
Or how about the Sheryl Crow concert? Shoot, I’d be happy with a Sheryl Crow CD! No, the only freebie I’ve gotten from my bank was a pad of Post-it notes, and I had to distract the banker to get those (“Look, it’s Hailey’s comet!” Point with the left hand, snatch with the right).
When I grow up, I want to be a Northern Trust client.
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