Wachovia gets surprise inspection!

[Col. Crackpot]

Ghetto edit: I used to be with Wachovia but I got out of it almost a year ago and have an account at a credit union now.

Careful with small credit unions. Generally they have relaxed underwriting guidelines for lending to members. Most will (still to this day) write mortgages and home equities with mid 500 FICO scores. When times get tough they are usually among the first to go. In 1990 several DOZEN Credit Unions went belly up at once in Rhode Island and crippled the state for years.

Doesn't the NCUA insure credit union accounts in the same manner the FDIC does standard bank accounts?

Yes, generally they hold similar guidelines. 100K per depositor. 250K for IRA's Keough's and coverdells. yadda yadda yadda

[J]

on principal? You do know that UBS is being called to the mat by congress and the Democratic leadership for helping billionaires hide money in tax havens like Litchenstien? What principals might those be?

Not to mention bleeding money to the tune of nearly $12B in the first quarter, or a loss of $6 a share. They're not in good shape, and god help you if the investigation by Congress gets teeth and UBS has its US banking rights revoked.

[The Duchess of Zeon]

Careful with small credit unions. Generally they have relaxed underwriting guidelines for lending to members. Most will (still to this day) write mortgages and home equities with mid 500 FICO scores. When times get tough they are usually among the first to go. In 1990 several DOZEN Credit Unions went belly up at once in Rhode Island and crippled the state for years.

Doesn't the NCUA insure credit union accounts in the same manner the FDIC does standard bank accounts?

Yes, generally they hold similar guidelines. 100K per depositor. 250K for IRA's Keough's and coverdells. yadda yadda yadda

BECU is to my knowledge one of the largest credit unions in the country (it's certainly the largest in the state), and both Amy's accounts and soon mine will be with it--quite the difference from the regular small area credit union.

[The Kernel]

Well, the FDIC has around $50 billion in assets while BoA has well over ten times that amount in deposits. The math is not very promising for BoA account holders...

You're making three wrong assumptions here:

1) That the government would not simply infuse the FDIC with cash to keep consumer confidence in the banking sector.

2) That if BOA did go under they would suddenly have $0 to pay out their account holders, which is of course a ridiculous assumption. The FDIC can even go as far as selling off corporate assets to pay back account holders.

3) Not all of that $500 billion figure is FDIC insured in the first place

[The Kernel]

on principal? You do know that UBS is being called to the mat by congress and the Democratic leadership for helping billionaires hide money in tax havens like Litchenstien? What principals might those be?

What the hell does this have to do with what I said? It's just a fact that investment banks will provide better retail banking services for the most part over traditional brick and mortar institutions given that their revenue model isn't heavily based on hitting up their checking account holders with esoteric fees. Sure, they'll make money off of me on the brokerage side, but they'd be doing that anyway.

As for whatever shenanigans that UBS is engaged in they don't really affect me unless UBS goes belly up, which seems very unlikely. Besides, the wealth management group I work with is not part of any of the latest scandals.

[The Kernel]

BECU is to my knowledge one of the largest credit unions in the country (it's certainly the largest in the state), and both Amy's accounts and soon mine will be with it--quite the difference from the regular small area credit union.

Indeed, BECU is huge. They have so much presence in the northwest, they are a banking giant in their own right.

[J]

You're making three wrong assumptions here:

1) That the government would not simply infuse the FDIC with cash to keep consumer confidence in the banking sector.

And that further devalues the USD, ramps up inflation & interest rates, adds to the government debt and does all kinds of other bad things. The government will almost certainly do it though.

2) That if BOA did go under they would suddenly have $0 to pay out their account holders, which is of course a ridiculous assumption. The FDIC can even go as far as selling off corporate assets to pay back account holders.

An asset selloff is almost guaranteed, the question is will anyone actually buy those assets and how much will they pay for them. The latter point can blow the entire banking system to smithereens; it's likely that quite a few of those assets will fetch pennies on the dollar, which means all other banks holding those same classes of assets have just had their books "marked to market" and seriously devalued and as a result the entire US banking system could find itself insolvent overnight.

3) Not all of that $500 billion figure is FDIC insured in the first place

Of course not. However if even 20% of it is insured it's enough to cause a lot of pain and possibly a market dislocation. And of course other banks will be going down in the meantime and draining the FDIC's reserves.

[The Kernel]

J, you do realize that this latest crisis hasn't led to nearly the number of bank failures as say the S&L scandal right? Some of the worst prediction suggest that it might get that bad, but outright bank failures probably aren't going to be as bad or as prevalent as during the S&L mess.

Also, I heard an interesting interview with Sheila Bair the other day where she pointed out that even during the worst of the S&L scandal the FDIC not only caught up with FDIC insured funds, but actually managed to average an 80-85% return on non-insured bank deposits. This is a pretty damn good track record if you think about it.

Just thought I'd point this out.

And that further devalues the USD, ramps up inflation & interest rates, adds to the government debt and does all kinds of other bad things. The government will almost certainly do it though.

Certainly, but as you say, we can bet that it will almost definitely happen exactly this way. I'd even say that it SHOULD happen this way as some devaluation of the dollar is a lot less scary than lack of confidence in the banking sector.

An asset selloff is almost guaranteed, the question is will anyone actually buy those assets and how much will they pay for them. The latter point can blow the entire banking system to smithereens; it's likely that quite a few of those assets will fetch pennies on the dollar, which means all other banks holding those same classes of assets have just had their books "marked to market" and seriously devalued and as a result the entire US banking system could find itself insolvent overnight.

I'm familiar with all of the problems associated with mark-to-market accounting and how easy it is to abuse. However, you need to consider that most of these large financial institutions are heavily divested enough to absorb the hits from these losses. It's the investment banks that specialized in mortgage backed securities that are in trouble (see Bear Sterns) and will be struggling with liquidity and exposure. However, many of these large banks have already written off their portfolios of questionable securities so they should be just fine.

In short your doom and gloom scenarios that you are worried about here are very unlikely to materialize. The banks are taking a pounding right now, but that's because they are in the process of writing down most of these garbage investments, even the ones that haven't exploded yet. When they do finally come crashing down, everyone who matters will have already taken them off their books.

Of course not. However if even 20% of it is insured it's enough to cause a lot of pain and possibly a market dislocation. And of course other banks will be going down in the meantime and draining the FDIC's reserves.

Very unlikely. The number of bank failures this year has actually been pretty low compared to, as I said, the S&L scandal. You can talk all you want about doomsday scenarios but without evidence to back it up it all comes across as a bit of Chicken Little.

If you really want to prove that the big FI's are in trouble, why not show me a big bank that is in danger of insolvency because of overexposure to mortgage backed securities that are still on their books. If you can come up with such a test case, then we can try applying it to several other big banks to see how it holds up.

[J]

J, you do realize that this latest crisis hasn't led to nearly the number of bank failures as say the S&L scandal right? Some of the worst prediction suggest that it might get that bad, but outright bank failures probably aren't going to be as bad or as prevalent as during the S&L mess.

Yet. We're still in the first couple innings of the ballgame, subprime is currently working its way through the system and Alt-A option ARM resets are due to peak in another couple years, and that market is a lot larger than subprime.

I'm familiar with all of the problems associated with mark-to-market accounting and how easy it is to abuse. However, you need to consider that most of these large financial institutions are heavily divested enough to absorb the hits from these losses. It's the investment banks that specialized in mortgage backed securities that are in trouble (see Bear Sterns) and will be struggling with liquidity and exposure. However, many of these large banks have already written off their portfolios of questionable securities so they should be just fine.

The estimates I've seen point to around a trillion dollars of required writedowns to account for the current mess, so far we've seen less than half that amount, the rest has been moved into Level 3 assets and stamped with an arbitrary value which has no relation to reality. As for divestment, well, quite a few banks, especially the smaller to medium sized ones are heavily loaded in homes & real estate. Most of their holdings are in mortgages, MBS, home builders, credit cards, and commercial RE, all of which are in trouble.

In short your doom and gloom scenarios that you are worried about here are very unlikely to materialize. The banks are taking a pounding right now, but that's because they are in the process of writing down most of these garbage investments, even the ones that haven't exploded yet. When they do finally come crashing down, everyone who matters will have already taken them off their books.

A year ago they were saying subprime was contained, and a Q4 07 or Q1 08 recovery was almost certain. Half a year ago they said we'd be well on the upswing by Q3 08. We'll see how things work out in a couple years.

If you really want to prove that the big FI's are in trouble, why not show me a big bank that is in danger of insolvency because of overexposure to mortgage backed securities that are still on their books. If you can come up with such a test case, then we can try applying it to several other big banks to see how it holds up.

WaMu, Wachovia, First Fed, National City Corp. All have heavy exposure in RE bubble states, all are taking heavy losses. Oh, and they've all claimed to be "well capitalized" only to make massive share offerings with 8% or higher convertibles within the next week, and some have done that multiple times.

[Uraniun235]

You're making three wrong assumptions here:

1) That the government would not simply infuse the FDIC with cash to keep consumer confidence in the banking sector.

And that further devalues the USD, ramps up inflation & interest rates, adds to the government debt and does all kinds of other bad things. The government will almost certainly do it though.

What's the alternative? Let FDIC fail and watch the biggest bank run in history unfold? Last I heard that was pretty bad too.

[Uraniun235]

One other thing:

The latter point can blow the entire banking system to smithereens; it's likely that quite a few of those assets will fetch pennies on the dollar, which means all other banks holding those same classes of assets have just had their books "marked to market" and seriously devalued and as a result the entire US banking system could find itself insolvent overnight.

Wouldn't the European banking system also suffer the same problem?

[Pelranius]

Yes, and I've also heard how the FDIC has been treating people in California, so I sure as hell don't want to be stuck with my money there when BOA does fail, as it will now that it's bought Countrywide.

Ah shit, my checking account is in BoA. It's not very much money though, since its a student account and I would probably make back all that money in the next semester of college, but I'd still like to have it all the same.

[J]

What's the alternative? Let FDIC fail and watch the biggest bank run in history unfold? Last I heard that was pretty bad too.

Yes, it will suck like the Great Depression, but it clears the system and sets the stage for a recovery. A bailout just moves the crisis into the future, with interest, and may well result in the US having to default on its debt. You don't want to imagine the implications of that.

The latter point can blow the entire banking system to smithereens; it's likely that quite a few of those assets will fetch pennies on the dollar, which means all other banks holding those same classes of assets have just had their books "marked to market" and seriously devalued and as a result the entire US banking system could find itself insolvent overnight.

Wouldn't the European banking system also suffer the same problem?

Yes, the UK and Spain are already suffering from these problems, and as the recession deepens more & more countries will be dragged down. There's been quite a few questionable banking incidents over there as well, UBS comes to mind, and the EU is by no means immune from the financial problems plaguing the US.


Also, an update on Wachovia.
Bloomberg link

Wachovia Has Record $8.9 Billion Loss, Cuts Dividend (Update4)

By David Mildenberg

July 22 (Bloomberg) -- Wachovia Corp., the U.S. bank that hired Treasury Undersecretary Robert Steel as chief executive officer two weeks ago, reported a record quarterly loss of $8.9 billion, slashed the dividend and announced 6,350 job cuts. The stock slumped as much as 10 percent in New York trading.

The second-quarter loss of $4.20 a share compared with net income of $2.3 billion, or $1.23, a year earlier, the Charlotte, North Carolina-based company said today in a statement. The loss included a $6.1 billion charge tied to declining asset values.

The writedown, job cuts and second dividend reduction in three months reflect Steel's response to the worst housing market since the Great Depression, which cost former CEO Kennedy Thompson his job after eight years. Wachovia has dropped more than 75 percent since it spent $24 billion two years ago to buy Golden West Financial Corp. just as home prices were peaking.

``Steel is clearly trying to get his arms around this,'' said Joseph Gordon, president of Gordon Asset Management in Durham, North Carolina, which owns Wachovia shares and manages more than $200 million. Even so, ``We aren't advising any clients to buy until they fess up and go full transparency on Golden West and their commercial lending problems.''

Wachovia shares have declined 65 percent this year, the second-worst performance on the 24-company KBW Bank Index behind National City Corp., Ohio's largest bank. The stock fell $1.18, or 9 percent, to $12 at 9:55 a.m. The cost of protecting the bank's debt rose 10 basis points to 315, according to broker Phoenix Partners Group. Fitch Ratings cut Wachovia one level to A+ from AA-, citing its mortgage business, and Moody's downgraded the bank to A1 from Aa3.

Job Cuts

Wachovia, whose job cuts amount to about 5 percent of the bank's workforce, lowered the dividend to 5 cents a share from 37.5 cents and will leave 4,440 positions open, according to a presentation to analysts today. Steel, 56, also said the company is moving to ``sell selected non-core assets'' and reduce the number of business customers who only use the bank for loans rather than other services. Wachovia expects to cut expenses during the second half of this year by $490 million and then reduce 2009 spending by $1.5 billion.

The second-quarter loss marks the first time Wachovia has posted consecutive losses in at least 20 years, data compiled by Bloomberg show. Wachovia's report follows the release of better- than-estimated quarterly results at JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.

``The entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position and reducing risk,'' Steel said in the statement.

Retail Banking

Wachovia's goodwill impairment charge didn't include its Golden West business ``due to the value of the retail banking franchise,'' the company said. The impairment included $4.5 billion in reduced value of commercial loans, plus $597 million in investment-banking assets.

Wachovia said July 9 that losses in the three months ended June 30 would be at least $2.6 billion, after $3.3 billion of losses on option-adjustable-rate mortgages. The loans let borrowers skip part of their payment and add the balance to principal. The bank said last month that it stopped offering the mortgages.

Declining house prices in California and Florida, which account for about 70 percent of Golden West's $121 billion of loans, have left 14 percent of the bank's option-ARM customers with zero or negative equity in their homes. Merrill Lynch & Co. Merrill Lynch & Co. analyst Edward Najarian estimated on July 9 that losses from the loans would total about $18 billion over four years, double those previously estimated by Wachovia.

Housing Worsens

The outlook for housing worsened in the second quarter, Wachovia said. Twenty-five metropolitan areas account for 90 percent of the option ARM historical losses with 22 of those markets in either California or Florida, the bank said. The exceptions include Washington D.C., Phoenix, Arizona and Las Vegas.

Profit at the division that includes retail, small business and commercial customers fell 23 percent to $1.12 billion. Growth in new checking accounts slowed from the previous quarter.

Steel has called Wachovia's consumer banking franchise the best in the U.S. because of its coverage of affluent and fast- growing markets stretching from Connecticut to California.

The corporate and investment bank earned $209 million, compared with $779 million a year earlier. Wachovia has announced 500 job cuts at the unit this year as demand wanes for packaging home loans into securities and advice on mergers.

Capital Management

Earnings at the capital management subsidiary fell to $297 million from $312 million. The unit includes the A.G. Edwards Inc. brokerage acquired last October and the Evergreen asset management company.

In addition to Golden West, Thompson was criticized by shareholders after Wachovia was forced to pay as much as $144 million to settle complaints it failed to police telemarketers and payment processors who looted customer accounts. The bank also reported a $975 million charge because of a tax court ruling involving leasing transactions.

Wachovia's securities division was inspected last week by regulators from more than five states who delivered subpoenas as part of a probe into the company's sales of auction-rate bonds.

Wachovia's Tier 1 capital ratio -- a benchmark regulators use to monitor a lender's ability to withstand loan losses -- rose to 8 percent from 7.42 percent at the end of the first quarter. The minimum for a ``well-capitalized'' rating from U.S. regulators is 6 percent.

$8.9 billion quarterly loss, that's going to leave a mark. Continuing losses from mortgages & loans which will be higher than forecast, falling revenues in banking & investment, and attention from the regulators (at last). I foresee this going from bad to worse.

[Darth Wong]

It's interesting that all of these people are saying "the system failed". But the word "system" implies that there are rules, and who is supposed to set those rules? Oh yeah, government regulators. But nobody says "the government failed".

[Einhander Sn0m4n]

It's interesting that all of these people are saying "the system failed". But the word "system" implies that there are rules, and who is supposed to set those rules? Oh yeah, government regulators. But nobody says "the government failed".

The system didn't fail, it was dismantled. When the Glass-Steagall Act was repealed, it allowed commercial and investment banks to consolidate, which is a fancy way of saying 'The bastards gambled with YOUR MONEY'. Couple that with many years of artificially-low interest rates (thank the Fed, which is actually a private bank, just a really big one) causing many people to buy things they cannot afford with the banks' help, along with these loans being repackaged as investment vehicles, and we have a recipe for the massive buildup of gigantic debt on a global scale. Add to that lots of deregulation which enabled off-the-balance-sheet shenanigans on a grand scale, as well as Risk Socialism (read: they win, they keep the money; they lose, they make The People pay for it); and we have a recipe for a financial bloodbath that could be touched off by the tiniest stray margin call.

Needless to say, the home-equity market was the Joker that got pulled out of our lovely financial house of cards, and now EVERYTHING is burning due to banks' proclivities for hitching everyone to everyone else. Inflation is the consequence of this chicanery, and it's just one way The People will pay for the crimes of the bankers.

So yeah, frog-march the bastards!

[SirNitram]

Amazing what happens when folks with convictions for fraud, money laundering, and larceny are hired by banks, huh?

What astounds me is the blowup over Fannie and Freddie. The big announcement today is that the estimate is averaged to 25B. Before we even do the 'Billion here, billion there..' routine on Government, the total writedowns of this entire mess passed 100B a while ago. The bailouts so far have been more.

But if you dare suggest that the government actually guarantee what it already guarantees.. Well, that's just unacceptable. It's something to make a grand circus around. Quick, complain more about the Macs so no one notices the increasing number of fraud investigations, charges, and arrests. Use it to deflect comments on the present writedowns and poor performance.

Are the Macs run sensibly today? Fuck no. Conservative dogma converted them into extremely hazardous and toxic things in a market: Entities whose risks were socialized but profits were capitalized. That needs a revamp, it needs to be changed. But the circus is obvious.

[Col. Crackpot]

$8.9 billion quarterly loss, that's going to leave a mark. Continuing losses from mortgages & loans which will be higher than forecast, falling revenues in banking & investment, and attention from the regulators (at last). I foresee this going from bad to worse.

There is on shining spot remaining in the banking industry: Fee Income. If you haven't noticed, demand deposit account overdraft fees are approaching $40 a whack for most banks. Mutliply that by half a dozen debit card transactions over a weekend and BAM!

Here's something to think about. The checking account portfolio for the average bank branch (large super-regional Like Wachovia, WaMu, RBS Citizens) numbers thousands of accounts. About 100 get overdrawn a day. figure an average of 2.5 overdraft transactions per account at an industry average of $33. 255 business days a year equals a conservative estimate of over $2 million a year per branch. RBS Citizens (Citizens and Charter One Banks) for example has 1200 branches....

This is why most of these banks won't up and fail. They'll keep funking people who can't balance their checkbooks to the tune of a couple billion a year in overdraft fees.

[Uraniun235]

What's the alternative? Let FDIC fail and watch the biggest bank run in history unfold? Last I heard that was pretty bad too.

Yes, it will suck like the Great Depression, but it clears the system and sets the stage for a recovery. A bailout just moves the crisis into the future, with interest, and may well result in the US having to default on its debt. You don't want to imagine the implications of that.

Wouldn't people rather renegotiate payment plans before it came to defaulting on debt? Or is that just too 19th century for today's financiers?


I get the impression that you think the banking system simply needs to collapse. Is that accurate?

[Darth Wong]

$8.9 billion quarterly loss, that's going to leave a mark. Continuing losses from mortgages & loans which will be higher than forecast, falling revenues in banking & investment, and attention from the regulators (at last). I foresee this going from bad to worse.

There is on shining spot remaining in the banking industry: Fee Income. If you haven't noticed, demand deposit account overdraft fees are approaching $40 a whack for most banks. Mutliply that by half a dozen debit card transactions over a weekend and BAM!

Here's something to think about. The checking account portfolio for the average bank branch (large super-regional Like Wachovia, WaMu, RBS Citizens) numbers thousands of accounts. About 100 get overdrawn a day. figure an average of 2.5 overdraft transactions per account at an industry average of $33. 255 business days a year equals a conservative estimate of over $2 million a year per branch. RBS Citizens (Citizens and Charter One Banks) for example has 1200 branches....

This is why most of these banks won't up and fail. They'll keep funking people who can't balance their checkbooks to the tune of a couple billion a year in overdraft fees.

Ironically enough, this is a good example of the importance of diversity: something that every investment advisor tells every client, and yet none of the investment banks did themselves in their business model. Retail banks have a diversified business model; investment banks do not.