Wells Fargo Gets It

I haven’t had a chance to fully digest the recent turn of events that have seen the Senate pass the massive bailout (and then some) one day, the House of Representatives reverse its previous decision on the next, and President Bush sign the bill the same day. This strikes me as eerily similar to the justification for the Iraq War proffered by the Bush Administration: the financial markets have WMD, we must invade them, and there is no time to dawdle or falter. Only maybe they don’t have the liquidity crisis we thought they did.

This interview with John Stumpf, CEO of Wells Fargo, lays out a better understanding of the situation from one of the major players on the ground, so to speak. There are some great insights (sorry that they’re big quotes, but I liked them so much that I didn’t want to trim them):

On why Wells Fargo isn’t in trouble, while others are:

We never participated in some of the real exotic things that the industry and others participated in. For example: we never understood why it made sense to make someone a loan, a home mortgage with negative amortization. So you would owe more on the home later than what you started with. That didn’t seem sensible to us. We don’t do it in any other credit products, not in credit card, why would you do it on someone’s home? Because you don’t know what’s going to happen in the future. You don’t know what’s going to happen to home values, so you owe more than what you start with some time later, or you underwrite somebody so they can pay a ‘teaser rate’ … part of the rate, and they can’t afford the full rate. How can that possibly make sense? So as we saw, and we probably didn’t see as early as we should have, but as you see 5-6 years of unprecedented appreciation, some time it is going to go down. So we started to trim back and thank goodness we didn’t do a lot of those things, but here’s the real secret … many companies not only did that for their portfolio, they also structured off balance sheet vehicles known as ‘SIV’s and CDO’s and CLO’s. I thought a SIV was a four-wheel drive; I had no idea what it was! And they put these products, and they leveraged their balance sheets with these off-balance sheets things, these vehicles that add NO value and now they’re coming back on-balance sheet. And that’s where the 380 billion dollars of losses have happened around the industry and we didn’t participate in that.

On the blame for the subprime mortgage crisis:

Yes, but they [mortgage brokers] get paid when someone signs a loan, and they’re out of it. Well you can imagine the opportunities for not telling the truth; the so-called ‘liar loans’. A number of borrowers said and thought themselves, this thing is going to the moon. And they told fibs about their occupancy interests, in other words … they said they were gonna live there but they really weren’t. It was their fifth loan. Or they lied about their income. Or they expected that somehow this would all work out, and it didn’t. So the originators are part of the problem. Over-aggressive borrowers have some blame. The rating agencies, the syndicators … So, and what happened to the days I used to borrow money, I still borrow money for home loans … I went to a bank or an S & L and that person took your application, reviewed all your information, verified your income, verified all of what you could afford and said, “here’s how much you can afford to borrow.” And then they put that loan on their books. Today, many times you go to … the originator says, “What would you like to buy and I’ll figure out a way to make the paperwork justify it.” It was done in just the opposite way in a lot of situations. So, but let’s also keep this in perspective. I’m not minimizing the problems at all. But the Treasury Department recently shared information that’s pretty interesting. There are 80 million homes in America. Of those 80 million homes, 25 million have no debt on them at all. Of the 55 million that have debt on them, 51 million are fully current. 4 million are in some situation of past due and of that 4 million, 1 million are in foreclosure. Now that’s a big number. It’s problematic. Congress is working on that, regulators are working on that, the banks through help now are working on that. These are big issues, but it has to be kept in perspective.

On the “liquidity crisis:”

I’m not sure that I would buy that statement [that people with really good credit are having trouble getting loans]. Now maybe that’s true but what I’m hearing more from customers is, “I want credit on the same terms that I got at 3 or 4 years ago.” With no documentation, no income verification and at the rate, and frankly, we didn’t put mortgages in our books or even a lot of credit in our books a few years ago because there was no return built in for risk. These were viewed as riskless assets, and they’re not. So today, we are getting paid for the risk and frankly for some of the liquidity. So it’s built into the rate, but for the most part … and while credit, there’s always this talk about credit crunch and liquidity crunch, I’m not so sure there’s a liquidity crisis. There’s plenty of money out there. Now on the credit side, if you qualify, you can get credit.

Well, there can’t be [a liquidity crisis]. Look at what happened … 380 billion dollars of losses in the industry have been recapitalized. I mean, just look around. Capital is flowing everywhere. We saw in our industry where Wamu got 7 or 8 billion dollars of capital recently, and Citigroup has raised capital, and National City has raised capital; I mean there’s capital all over the place.

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