Wells Fargo

How much time does Vikram Pandit have?

Jim Kim — Tue, 18 Nov 2008 07:55:15 -0500

Granted, these are extraordinary times, so you can't really blame CEO Vikram Pandit for the stock swoon that has sent Citi shares to a 12-year low. And you have to feel bad that he didn't get much of a honeymoon. But you have to wonder how much time the board will give him. The public furor over the extent to which the board backed chairman Win Bischoff is a sign that directors may be getting restive.

The issue with Pandit seems to be the perception of change. So far, investors have not generally perceived a leader that can right the ship. The Financial Times notes that Pandit is leading a massive review of operating expenses and IT costs with an eye on savings. He's also bent on cleansing the balance sheet of more toxic assets. But this is exactly what you would expect. Where's the insight? That's what the investors want. And the fact is, Citi's main competitors, notably Bank of America, JPMorgan Chase and now Wells Fargo, have found ways to expand their footprint and gain market share. Which is impressive when you stop and think about it. Extraordinary times call for extraordinary leadership.

For more:
- here's the Financial Times article

Should revolving Goldman-government door be investigated?

Jim Kim — Mon, 17 Nov 2008 13:36:14 -0500

It's a grand tradition at Goldman Sachs: Retire wealthy and go into public service. Henry Paulson is but one example of a former Goldman exec who moved into the highest echelons of government. But so many execs have made the move that some wonder if all this creates some conflicts of interest. Is it possible that they are still looking out for their ex-colleagues?

The Financial Times reports Chuck Grassley, the most senior Republican on the Senate finance committee, has asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who once worked at Goldman Sachs. The issue is the appearance of preferential treatment, specifically regarding the appointment of Robert Steel, a former Goldman Sachs exec, as CEO of Wachovia. Until recently, Steel also worked at the Treasury. Another issue is the tax-code change that seemed to benefit Wells Fargo as it sought to buy Wachovia.

For more:
- here's the article

Lawmakers seek answers on TARP funds

Jim Kim — Thu, 13 Nov 2008 14:14:57 -0500

Congressmen got their chance to ask banking executives what they were going to do with their loans. The answers were not surprising. execs from Goldman Sachs, JPMorgan Chase, Bank of America and Wells Fargo told the Senate Banking Committee that they were not using TARP funds for bonuses and were using the funds to expand credit. But lawmakers seemed a bit skeptical and reiterated that they wanted the banks to make loans--which we can all sympathize with. But you have to be circumspect, you certainly don't want to make bad loans with TARP funds. This isn't a great environment for lending. Using funds to modify mortgages, however, seems wise. All in all, as more money from the $750 billion TARP is doled out, more restrictions may be put in writing.

For more:
- here's the article

What to do with the 10 percent deposit cap?

Jim Kim — Fri, 07 Nov 2008 13:12:03 -0500

The 10 percent federal cap on ownership of U.S. deposits has drawn a lot of attention this year. Earlier, the view was that at least one bank, Bank of America, was constrained a bit in terms of additional acquisitions because they were close to the limit. The LaSalle deal put it close. But we've also been assured that there were ways around the rule--there always are, it seems, for better or worse.

TheStreet.com notes Bank of America would be over the limit, but for the facts that Countrywide's assets are accounted for in its thrift unit and Merrill Lynch's assets are in its thrift and industrial loan unit. Other firms, notably, Wells Fargo, are moving closer to the limit. So we may see some banks try to get the cap raised or abolished all together. The fear way back when was that banks might become too powerful. In the face of the crisis, that's now a back-burner issue.

For more:
- here's the article

What to make of Wells Fargo's capital raise

Jim Kim — Wed, 05 Nov 2008 19:12:21 -0500

Last month, Wells Fargo said it would raise up to $20 billion primarily by selling common shares. But then came the TARP, and the San Francisco-based bank was required to raise $25 billion by selling preferred shares to the federal government. That seems to have prompted it to give current common shareholders a break; it announced it will raise only $10 billion by selling common shares. So this seems to be a case of using TARP funds to at lest partially fund a big acquisition. Not that there's anything wrong with that. Despite the early admonishment to lend TARP funds, it's clear that banks have leeway to use it as they see fit--even if they hoard it. That at least pads its capital ratios. The only use that may be unpalatable is to make outsized bonus payments.

For more:
- here's a Fortune item on the announcement

Are banks starting to look better?

Jim Kim — Wed, 05 Nov 2008 13:17:17 -0500

We noted a while back that the creation of the TARP might prod more equity analysts to rethink their positions on top banks. We're seeing some movement in that direction and there is definitely a case to be made regarding some banks. One picker at Covestor.com has turned bullish on JPMorgan Chase, which he predicts could be trading toward $55 soon. The stock may be looking cheap, as it trades at a "reasonable" 1.6x tangible book value, while Wells trades at 3.1x. It's also something of a yield play at 3.7 percent. Here's the interesting part of the recommendation: Why not hedge your JPMorgan bet with a short bet on Wells Fargo, which may have some greater challenges ahead? Indeed, it may find digesting Wachovia, which digested Golden West, really problematic.

For more:
- here's the article on TheStreet.com

Who really is the banker of the year?

Jim Kim — Tue, 28 Oct 2008 08:45:39 -0400

The American Banker has announced its banker of the year: Bank of America CEO Ken Lewis. Now some of you might argue that this would have been a good year to simply not give an award. Others might quibble that a better choice might have been JPMorgan Chase's Jamie Dimon. TheDeal.com takes a look at the merits of each and examines why each would have been a decent choice. Both were able to improve their banks' standing during the crisis. In the end, though, adding Merrill Lynch and Countrywide trumped adding Bear Stearns and Washington Mutual. But the award may well prove premature no matter who won. There's not a guarantee that either bank will make their deals work. The most deserving winner might end up being Dick Kovacevich of Wells Fargo.

For more:
- here's the item from TheDeal.com

Wachovia's earnings: A shocking loss

Jim Kim — Wed, 22 Oct 2008 13:09:24 -0400

Wachovia's last earnings announcement was a doozy. It reported a massive $24 billion loss. That's $2.23 a share loss versus expectations of a 2 cents a share loss. Ouch! Portfolio wonders if Vikram Pandit was sitting back chuckling. His counterpart at Wells Fargo, John Stumpf, put the right spin on it: "We're more encouraged than ever by what we've seen in their franchise, and we're pleased that Wachovia's team continues to focus on serving customers." But clearly the carnage inflicted by the credit crisis was severe. "While average deposits were up 4 percent during the period, actual deposits at the end of it were down 2 percent over last year, which suggests a bit of a run on the bank during the final weeks of the quarter," Portfolio writes. And here's the shocker: Wachovia said it expects losses of various option ARM-type mortgages to hit $26 billion by the end of next year. Recall that it paid $27 billion for Golden West last year. Wells seems to know what it is getting into. We'll see.

For more:
- here's the article

The big loser in the credit crunch?

Jim Kim — Wed, 22 Oct 2008 11:23:36 -0400

Here's an interesting question: Just how costly will Citigroup's inability to close the Wachovia deal prove? Bloomberg notes that Citigroup will soon be relegated to the No. 4 position in the banking world, slipping behind the new big three of Bank of America, JPMorgan Chase and Wells Fargo--all of which enhanced their core franchises in the crunch. In the new banking universe, deposits are the key, the capital foundation upon which all else will be built. So what will Vikram Pandit do? Well, in the immediate future, he needs to shore up the bank's financial footing. The economic slowdown will certainly make that harder, though the bailout package will help. No one doubts that the firm will survive, but the transition may leave it the worst positioned of the big banks. Most people seems to think that Citigroup will need to make a big purchase of a consumer bank. If not, the Pandit era may be remembered as the one in which the bank moved to a lower tier.

For more:
- here's the Bloomberg article

Now they're really too big to fail

Jim Kim — Mon, 20 Oct 2008 07:52:36 -0400

The idea of a moral hazard on Wall Street is not new, but it is relevant again, as the government keeps on bailing out out the top banks. To some, this is just plain wrong, despite the deleterious economic consequences, because Wall Street banks are never forced to own up to their actions. We'll see if any real prosecutorial activity emerges. Going forward, it will be even harder to let the top banks fail. Breakingviews notes that Bank of America, Wells Fargo and JPMorgan Chase (you also might as well throw in Citigroup) are so massive now that the first three may be up against the 10 percent limit on all domestic deposits. Which is to say that, at this point, there's no way the government can let them fail. Long term, once the crisis is over, will this encourage the sort of risky behavior that helped spawn the current mess?

For more:
- here's the Breakingviews article via the New York Times