U.S. Files Civil Mortgage Fraud Suit Against WFC

[Parsad]

I'm sure more of these are going to pop up against other banks...BAC is probably next.  Cheers!

 

http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

[Kraven]

I'm sure more of these are going to pop up against other banks...BAC is probably next.  Cheers!

 

http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

 

Color me shocked.  This is like the jealous queen suing Snow White.  I had honestly thought that Wells did things perfectly.  Who knew.

[Uccmal]

I'm sure more of these are going to pop up against other banks...BAC is probably next.  Cheers!

 

http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

 

Color me shocked.  This is like the jealous queen suing Snow White.  I had honestly thought that Wells did things perfectly.  Who knew.

 

lol, must be an election coming.

[Rabbitisrich]

Does anyone have thoughts on the knockon effects of this lawsuit? The market is clearly discounting something beyond the penalties sought by the AG (6,320 loans from '02 to '10, $190+ MM damages alleged, $570+ MM penalties), given that the stock is down by $3.7 B.

 

Does this suit open up new legal vulnerabilities?

[Kraven]

I'm sure more of these are going to pop up against other banks...BAC is probably next.  Cheers!

 

http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

 

Color me shocked.  This is like the jealous queen suing Snow White.  I had honestly thought that Wells did things perfectly.  Who knew.

 

lol, must be an election coming.

 

Nope, no political commentary.  I find it interesting that many investors believe that among banks Wells is as pure as the driven snow.  Don't get me wrong, it's a fine institution, but they did all the same things the other banks did.  They are fortunate in that they weren't as good as the others.  Sometimes it's better to be lucky than good.  By that I mean that they tried to break into all the various structured products, securitization, derivatives, etc., but couldn't get any traction.  Once the financial crisis came and they came out of it smelling like roses (relatively speaking) there was a bit of revisionist history.  It's interesting that of all the banks that this action could be brought against, Wells was 2nd.  I love the banks, but think that Wells, while a good firm, isn't a great investment as least as compared to all the other cheaper banks out there.  I think that Wells has the Buffett imprimatur so is viewed as superior to the other financials.  People forget that it comes down to price. 

[Rabbitisrich]

Maybe, though I guess it depends on which investors you are talking about. One guy with a major stake in WFC was shocked when he saw their distribution of home loans in 2005, lol. But these products are commodities. To the extent that you have capital and distribution, ANYONE can compete. Saying that major bank X couldn't get traction in XYZ financial products is equivalent to saying that they wouldn't "        ".

 

If all banks did the same thing, then they would have shown equivalent results within some luck determined range.

[Kiltacular]

Nope, no political commentary.  I find it interesting that many investors believe that among banks Wells is as pure as the driven snow.  Don't get me wrong, it's a fine institution, but they did all the same things the other banks did.  They are fortunate in that they weren't as good as the others.  Sometimes it's better to be lucky than good.  By that I mean that they tried to break into all the various structured products, securitization, derivatives, etc., but couldn't get any traction.  Once the financial crisis came and they came out of it smelling like roses (relatively speaking) there was a bit of revisionist history.  It's interesting that of all the banks that this action could be brought against, Wells was 2nd.  I love the banks, but think that Wells, while a good firm, isn't a great investment as least as compared to all the other cheaper banks out there.  I think that Wells has the Buffett imprimatur so is viewed as superior to the other financials.  People forget that it comes down to price.

 

 

I'm far from being an apologist for the banking industry, but to the extent there is revisionist history, I don't think it is coming from Wells Fargo.

 

The shareholder letter for Wells from 2007 is particularly interesting in support of the notion that they didn't do the incredibly stupid things that many of the banks did.  And, while the 2007 letter is a good recap of what they didn't do, reading earlier shareholder letters up to 2007 are also useful.

 

As many recall, Kovacevich immediately emerged from the TARP meeting with the other bankers and the gov't and said he was forced to take the TARP money.  This is also substantiated in many books covering that period.

 

Wells wasn't perfect but they were far, far better than the average large bank (in my opinion, of course).  If all others behaved as they did, I don't think there would have been a problem anything like what was ultimately seen.

 

Here is a link to the 2007 annual report:

https://www.wellsfargo.com/downloads/pdf/invest_relations/wf2007annualreport.pdf

 

Page 5:

 

"Our company maintained its credit risk discipline reasonably well during the

years of excessive risk taking in our industry. Unlike many

of our competitors, we did not make option adjustable-rate

mortgages (ARMs)—consistent with our responsible lending

principles (www.wellsfargo.com/jump/truthinlending). We

did not make negative amortization ARMs. We offered in only

a very few instances, below certain credit scores, stated-income

mortgages and low- and no-documentation mortgages. Because

of our prudent lending to customers with less than prime credit

and our decision not to make negative amortization loans, we

estimate we lost between two and four percent in mortgage

origination market share from 2004 to 2006. That translates

into losing between $60 billion and $120 billion in mortgage

originations in 2006 alone. We’re glad we did.  Such lending

would have been economically unsound and not right

for many borrowers.

 

Unlike many of our competitors, we did not participate to

any significant degree in collateralized debt obligations (CDOs),

structured investment vehicles (SIVs) to hold assets off our

balance sheet, hedge fund financing, off-balance sheet conduits,

the underwriting of low-covenant or no-covenant, large, highly

leveraged loans and commitments to companies acquired by

private equity firms through leveraged buyouts (LBOs).

 

Our balance sheet strength enables us to take the long view.

We have minimal ARM interest rate “reset” risk in the loan

portfolios we own because we underwrote those loans to account

for higher interest rate resets. We sell the vast majority of our

mortgage loans to capital market investors. We believe our

commercial lending portfolio is among the highest quality of

any large bank in the nation.

 

We’re disappointed with the $1.4 billion in special credit

provision, but it is less than two percent of common equity after

tax, and it’s relatively small compared to the $163 billion in

write-downs taken by our competitors."

[mpauls]

Well, I can say this, "Chad" (from the video) is clearly an idiot.

[meiroy]

+1 Kiltacular, and that's just one example.

 

 

And, BTW (unrelated):

http://www.bloomberg.com/news/2012-10-09/u-s-charges-530-in-mortgage-fraud-probe-with-1-billion-losses.html

 

"The U.S. charged 530 people with targeting homeowners in mortgage schemes that cost the victims more than $1 billion, Attorney General Eric Holder said today.

More than 73,000 homeowners around the country were affected, the Justice Department said in a statement. The cases, brought over the past year, included “foreclosure rescue schemes” that take advantage of those who have fallen behind on payments, according to the statement."

 

BTW 2:

http://www.bloomberg.com/news/2012-10-09/imf-says-european-banks-may-have-to-sell-4-5-trillion-in-assets.html

 

"The International Monetary Fund said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis, up 18 percent from its April estimate."

 

Surely there would be some good bargains for USA banks and for US corporations sitting on all that hoard of cash.  I'm very happy having most of my portfolio in US banks.  WFC will be fine.

 

[Kraven]

Maybe, though I guess it depends on which investors you are talking about. One guy with a major stake in WFC was shocked when he saw their distribution of home loans in 2005, lol. But these products are commodities. To the extent that you have capital and distribution, ANYONE can compete. Saying that major bank X couldn't get traction in XYZ financial products is equivalent to saying that they wouldn't "        ".

 

If all banks did the same thing, then they would have shown equivalent results within some luck determined range.

 

Yes and no.  It wasn't always about capital and distribution.  That may have been the case in the frothy years (say 2006-2007), but before that when there wasn't unlimited dealflow it was about relationships.  Sure, a team could have been bought I guess, but it's never so easy to just start over.  I think too the products weren't always commodities.  Again, they may have become that and in all these cases it depends on exactly which product we're talking about.  But before things became bubblicious it was about innovation and deal technology (in terms of structures and the like).  There were better firms and clients did at one point care who was doing what.  I suppose though what you say is certainly correct at least once it got later in time.  So, good points.

[Kraven]

[unlike many of our competitors, we did not participate to

any significant degree in collateralized debt obligations (CDOs),

structured investment vehicles (SIVs) to hold assets off our

balance sheet, hedge fund financing, off-balance sheet conduits,

the underwriting of low-covenant or no-covenant, large, highly

leveraged loans and commitments to companies acquired by

private equity firms through leveraged buyouts (LBOs).

 

This was from 2007 (so early 2008?), but doesn't really prove your point.  When someone can't compete generally they will immediately take a different approach and say that they didn't want to.  In this case, the damage was already done.  It was beneficial to point out that they hadn't engaged in these types of deals.  It really doesn't respond to the point I made.  I said that they tried to compete but generally weren't able to gain traction.  Rabbitsrich made some good points and I agreed, in part, with them.  Perhaps it was about capital and distribution, at least once things got frothy, but before that I don't believe it was.  Wells did try to do these things.  Perhaps they could have tried harder, I can't speak to that, but once it all fell apart it was certainly their good fortune that they hadn't succeeded like some of the firms.

[txlaw]

Kraven, I doubt that most people on the board who are invested in WFC think that it can do no wrong.  More likely, they believe that the deposit franchise is one of, if not the best in the nation, due to its stickiness and low-cost nature; the management of expenses is phenomenal; branding there is great (it's higher end than grungy BofA); they appear to be better at cross-selling products than other financial institutions (I know you have doubted this in the past, though I don't really get why); they have been opportunistic acquirers as opposed to sucker acquirers (like BofA); and they didn't engage in some of the more complex financial shenanigans that took down a lot of the banks.

 

A lot of people do think for themselves rather than following WEB or HWIC, contrary to your general attitude to board members.

 

Now you appear to be questioning the following statement: WFC "did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off our balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs)."

 

My question to you is, why do you believe that the reason for this is due to their inability to get into the biz rather than prudence?  I'm interested to know if you have an inside scoop or were a banker at that time that might have a different view of the saintly WFC.

 

Note that I personally own no WFC and own a lot of BAC.  I do have my parents invested in WFC.

[Kraven]

Kraven, I doubt that most people on the board who are invested in WFC think that it can do no wrong.  More likely, they believe that the deposit franchise is one of, if not the best in the nation, due to its stickiness and low-cost nature; the management of expenses is phenomenal; branding there is great (it's higher end than grungy BofA); they appear to be better at cross-selling products than other financial institutions (I know you have doubted this in the past, though I don't really get why); they have been opportunistic acquirers as opposed to sucker acquirers (like BofA); and they didn't engage in some of the more complex financial shenanigans that took down a lot of the banks.

 

A lot of people do think for themselves rather than following WEB or HWIC, contrary to your general attitude to board members.

 

Now you appear to be questioning the following statement: WFC "did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off our balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs)."

 

My question to you is, why do you believe that the reason for this is due to their inability to get into the biz rather than prudence?  I'm interested to know if you have an inside scoop or were a banker at that time that might have a different view of the saintly WFC.

 

Note that I personally own no WFC and own a lot of BAC.  I do have my parents invested in WFC.

 

Txlaw, fair questions and points.  I will try to respond in kind.

 

In terms of whether people think WFC can do no wrong, I do believe that many do think that.  I have tried to make clear my point that I believe that WFC is a very fine bank.  I don't think it's a great investment.  Price determines value and I just think at best WFC is fairly priced.  The comments in various threads definitely skew to the positive on WFC.  If a bank like BAC is mentioned someone will invariably say "why invest in crap like BAC when you can do what Buffett does and invest in WFC?!"  Surely you have seen these comments, they happen all the time.  So is that "most" people?  Probably you're right on that and it isn't.

 

I also don't generally believe that all or most "board members" follow WEB or HWIC.  I do believe there are significant amount though that do.  See comment above.  This is just a personal viewpoint.  I think there are a substantial amount of independent thinkers who are very smart people though on the board and that's why I hang around.  If I didn't, I wouldn't.

 

Branding?  I personally don't think that most people care all that much.  It's more about pricing and convenience.  Sure, something like the debit card fees hurt BAC, but it's a vocal minority that care.  Take away the fee and no one gives a crap.  I firmly believe that most banking is about pricing and convenience.  Want a mortgage?  Does someone care which bank gives it to them?  No, it's about saving 2 bp and timeliness in closing.  That explains a lot about the stickiness of deposits.  It's not do no harm, it's do just enough so that people don't get pissed and walk.  In terms of cross selling, that's all meaningless corporate speak.  Every institution I've ever known does these things.  It all depends on what is being measured.  A teller can easily cross sell a mortgage so that would count as 1 cross sell, but a derivatives trader isn't going to cross sell that same mortgage and it's difficult for that guy to bring in an M&A client for example.  So while it's impressive that WFC has the top spot in that, it's the kind of thing that has no magic to it.  Someone else will have it some other time.  I just don't think it means much.

 

In terms of WFC not engaging in some of the more complex shenanigans, you are right, they didn't.  Originally it was due to prudence.  Later it was due to inability to catch up.  They got lucky, pure and simple.  I know that they desperately wanted to be in the biz.  They saw the tremendous profits being generated from financial products and wanted their share.  They didn't know how to build the business properly.  By the time they started throwing money at it, it was very late in the game and so the damage was contained.  I am unable to prove it to you.  So I guess what I say means nothing, but I can't do anything about that.  I have no more details I can provide.

 

To sum up, everything being equal, if WFC was being sold at the same valuation levels as say BAC, I'd be all over it.  I think it's a great bank.  I think they have a polished image that in some respects is well deserved and in other respects is part of a good PR machine.  I think that some of their good fortune is due to excellent management and some is due to being lucky to miss out on certain things.  I think that there are a number of people who believe that WFC is a superior bank investment because it has the Buffett imprimatur.  As I said, good bank, not good valuation.  There are tons of banks that perhaps aren't of the same quality but selling for fractions of WFC.  Banks that will be increasing by multiples, not percentages.  What's the best that happens with WFC?  It grows along with the economy and perhaps gets a little multiple expansion.  Nothing wrong with that, I just think there's better out there.

 

Hope I answered your questions fully.  If not, feel free to ask again.  I didn't intend to miss anything if I did.

[Parsad]

To sum up, everything being equal, if WFC was being sold at the same valuation levels as say BAC, I'd be all over it.  I think it's a great bank.  I think they have a polished image that in some respects is well deserved and in other respects is part of a good PR machine.  I think that some of their good fortune is due to excellent management and some is due to being lucky to miss out on certain things.  I think that there are a number of people who believe that WFC is a superior bank investment because it has the Buffett imprimatur.  As I said, good bank, not good valuation.  There are tons of banks that perhaps aren't of the same quality but selling for fractions of WFC.  Banks that will be increasing by multiples, not percentages.  What's the best that happens with WFC?  It grows along with the economy and perhaps gets a little multiple expansion.  Nothing wrong with that, I just think there's better out there.

 

I agree with that, and I think you could say the same thing about US Bank too.  Excellent banks, but their valuations are at a premium to their peers...deservedly so at this point in time.  It also doesn't mean that they won't maintain relatively high valuations for some time relative to their peers.  They avoided alot of the mess and are expanding when their peers are shrinking.  We own both BAC and WFC...the only banks we've ever owned...and we own a hell of a lot more BAC.  Cheers!

 

[txlaw]

Kraven, I doubt that most people on the board who are invested in WFC think that it can do no wrong.  More likely, they believe that the deposit franchise is one of, if not the best in the nation, due to its stickiness and low-cost nature; the management of expenses is phenomenal; branding there is great (it's higher end than grungy BofA); they appear to be better at cross-selling products than other financial institutions (I know you have doubted this in the past, though I don't really get why); they have been opportunistic acquirers as opposed to sucker acquirers (like BofA); and they didn't engage in some of the more complex financial shenanigans that took down a lot of the banks.

 

A lot of people do think for themselves rather than following WEB or HWIC, contrary to your general attitude to board members.

 

Now you appear to be questioning the following statement: WFC "did not participate to any significant degree in collateralized debt obligations (CDOs), structured investment vehicles (SIVs) to hold assets off our balance sheet, hedge fund financing, off-balance sheet conduits, the underwriting of low-covenant or no-covenant, large, highly leveraged loans and commitments to companies acquired by private equity firms through leveraged buyouts (LBOs)."

 

My question to you is, why do you believe that the reason for this is due to their inability to get into the biz rather than prudence?  I'm interested to know if you have an inside scoop or were a banker at that time that might have a different view of the saintly WFC.

 

Note that I personally own no WFC and own a lot of BAC.  I do have my parents invested in WFC.

 

Txlaw, fair questions and points.  I will try to respond in kind.

 

In terms of whether people think WFC can do no wrong, I do believe that many do think that.  I have tried to make clear my point that I believe that WFC is a very fine bank.  I don't think it's a great investment.  Price determines value and I just think at best WFC is fairly priced.  The comments in various threads definitely skew to the positive on WFC.  If a bank like BAC is mentioned someone will invariably say "why invest in crap like BAC when you can do what Buffett does and invest in WFC?!"  Surely you have seen these comments, they happen all the time.  So is that "most" people?  Probably you're right on that and it isn't.

 

I also don't generally believe that all or most "board members" follow WEB or HWIC.  I do believe there are significant amount though that do.  See comment above.  This is just a personal viewpoint.  I think there are a substantial amount of independent thinkers who are very smart people though on the board and that's why I hang around.  If I didn't, I wouldn't.

 

Branding?  I personally don't think that most people care all that much.  It's more about pricing and convenience.  Sure, something like the debit card fees hurt BAC, but it's a vocal minority that care.  Take away the fee and no one gives a crap.  I firmly believe that most banking is about pricing and convenience.  Want a mortgage?  Does someone care which bank gives it to them?  No, it's about saving 2 bp and timeliness in closing.  That explains a lot about the stickiness of deposits.  It's not do no harm, it's do just enough so that people don't get pissed and walk.  In terms of cross selling, that's all meaningless corporate speak.  Every institution I've ever known does these things.  It all depends on what is being measured.  A teller can easily cross sell a mortgage so that would count as 1 cross sell, but a derivatives trader isn't going to cross sell that same mortgage and it's difficult for that guy to bring in an M&A client for example.  So while it's impressive that WFC has the top spot in that, it's the kind of thing that has no magic to it.  Someone else will have it some other time.  I just don't think it means much.

 

In terms of WFC not engaging in some of the more complex shenanigans, you are right, they didn't.  Originally it was due to prudence.  Later it was due to inability to catch up.  They got lucky, pure and simple.  I know that they desperately wanted to be in the biz.  They saw the tremendous profits being generated from financial products and wanted their share.  They didn't know how to build the business properly.  By the time they started throwing money at it, it was very late in the game and so the damage was contained.  I am unable to prove it to you.  So I guess what I say means nothing, but I can't do anything about that.  I have no more details I can provide.

 

To sum up, everything being equal, if WFC was being sold at the same valuation levels as say BAC, I'd be all over it.  I think it's a great bank.  I think they have a polished image that in some respects is well deserved and in other respects is part of a good PR machine.  I think that some of their good fortune is due to excellent management and some is due to being lucky to miss out on certain things.  I think that there are a number of people who believe that WFC is a superior bank investment because it has the Buffett imprimatur.  As I said, good bank, not good valuation.  There are tons of banks that perhaps aren't of the same quality but selling for fractions of WFC.  Banks that will be increasing by multiples, not percentages.  What's the best that happens with WFC?  It grows along with the economy and perhaps gets a little multiple expansion.  Nothing wrong with that, I just think there's better out there.

 

Hope I answered your questions fully.  If not, feel free to ask again.  I didn't intend to miss anything if I did.

 

Thanks for the response, Kraven.  I think we actually see more eye to eye than indicated by my last post.

 

Yeah, I believe that WFC is nowhere near as undervalued as the other big banks, particularly BAC.  And I agree with your summary paragraph as well. 

 

I guess our choice re BAC versus WFC goes hand in hand with the debate that people are having regarding owning fairly/reasonably valued high quality businesses and hedging (or forgetting about it) versus accepting volatility.  Clearly, we are looking for much higher annualized returns with more volatility.

[Kraven]

To sum up, everything being equal, if WFC was being sold at the same valuation levels as say BAC, I'd be all over it.  I think it's a great bank.  I think they have a polished image that in some respects is well deserved and in other respects is part of a good PR machine.  I think that some of their good fortune is due to excellent management and some is due to being lucky to miss out on certain things.  I think that there are a number of people who believe that WFC is a superior bank investment because it has the Buffett imprimatur.  As I said, good bank, not good valuation.  There are tons of banks that perhaps aren't of the same quality but selling for fractions of WFC.  Banks that will be increasing by multiples, not percentages.  What's the best that happens with WFC?  It grows along with the economy and perhaps gets a little multiple expansion.  Nothing wrong with that, I just think there's better out there.

 

I agree with that, and I think you could say the same thing about US Bank too.  Excellent banks, but their valuations are at a premium to their peers...deservedly so at this point in time.  It also doesn't mean that they won't maintain relatively high valuations for some time relative to their peers.  They avoided alot of the mess and are expanding when their peers are shrinking.  We own both BAC and WFC...the only banks we've ever owned...and we own a hell of a lot more BAC.  Cheers!

 

Agreed.  US Bank is definitely in that same category.  There are others.  My feeling on anything that sells at a premium is that you have to be very right for the investment to work out.  WFC needs to continue doing exactly what it's doing, or perhaps even better, for the investment to really make sense.  Perhaps they will, I don't know.  What does BAC need to do to be a good investment?  Not that much.  It doesn't need to thrive.  So something costs an extra billion here or there.  It doesn't matter.  So it isn't worth BV but never gets above 80% of BV.  Still a great investment and obviously I think it will do better than that.  But there are so many smaller regional and community banks that are performing well and selling for the same kinds of valuation as BAC, but have none of the same issues. 

[Kraven]

Thanks for the response, Kraven.  I think we actually see more eye to eye than indicated by my last post.

 

Yeah, I believe that WFC is nowhere near as undervalued as the other big banks, particularly BAC.  And I agree with your summary paragraph as well. 

 

I guess our choice re BAC versus WFC goes hand in hand with the debate that people are having regarding owning fairly/reasonably valued high quality businesses and hedging (or forgetting about it) versus accepting volatility.  Clearly, we are looking for much higher annualized returns with more volatility.

 

Txlaw, you're welcome.  I agree with what you said.  I do believe we see eye to eye on these things.

[Kiltacular]

In terms of WFC not engaging in some of the more complex shenanigans, you are right, they didn't.  Originally it was due to prudence.  Later it was due to inability to catch up.  They got lucky, pure and simple.  I know that they desperately wanted to be in the biz.  They saw the tremendous profits being generated from financial products and wanted their share.  They didn't know how to build the business properly.  By the time they started throwing money at it, it was very late in the game and so the damage was contained.  I am unable to prove it to you.  So I guess what I say means nothing, but I can't do anything about that.  I have no more details I can provide.

 

Kraven,

 

This does seem like a version of the past that differs with what Wells had always said was their business model (no doubt things have changed post bubble).  Whether the business was proprietary trading or their decision not to by something like Golden West Financial (which sunk Wachovia, as you know), Wells always avoided this stuff.  I can't believe it wouldn't have been easy to buy into.  Everyone else was able to buy into these operations. 

 

And, I can't believe that Wells wouldn't have been able to loan money more easily leading into the bubble had they chosen to -- this notion seems easy enought to understand that I don't think it needs further explanation.

 

Now, that doesn't mean Wells, today, is worth some huge premium over the other big banks in the new "big bank oligarchy".  But, that wasn't what we were previously discussing, was it?

 

Anyway, I also think we see eye to eye on most of this stuff but I doubt it was just "luck" that allowed banks like Wells and U.S. Bank to avoid most of the mess since these two banks, as examples, were pretty explicit that they were sticking (generally) to community banking.  We can just agree to disagree on this specific point -- which was the only point I thought we were originally debating.

 

Today, Wells has, what, 35%+ of the mortgage origination market and huge position in servicing.  U.S. Bancorp has grown massively in this business as well.  They've expanded as others have been forced to retreat.  Perhaps that's part of the premium valuation.  Perhaps the premium valuation is a mistake by the market.

 

BoA, where I also have a large position, has been forced into retreat in this area -- not because of Moynihan but because of past decisions leading up to the bubble.

 

I guess we can just look back and say it was all luck but you wouldn't have ever heard Kovacevich saying: "As long as the music keeps playing [read: bubble keeps inflating], you have to keep dancing [read: loaning money to anyone with a pulse and leveraging up in every way possible]," as Chuck Prince did.

 

Going forward, the big banks generally look more similar, to me, than they look different but I don't think the banking industry looked this way before the meltdown.

 

 

 

 

[meiroy]

...

Today, Wells has, what, 35%+ of the mortgage origination market and huge position in servicing. 

...

Going forward, the big banks generally look more similar, to me, than they look different but I don't think the banking industry looked this way before the meltdown.

 

Regarding the first point, this seems to be a fact that cannot be denied.  It surely did not get there by luck, (I'm agreeing and repeating what you said.)  I don't think it's about volatility at all as another poster suggested, it's about risk and higher quality business reduces the risk combined with the following:

 

Regarding the second point, I disagree.  Corporate culture is very hard to change in such huge companies, WFC has proven what it is.  The great thing about the recent crash is that it was a test which allowed us to see who is what and who is not.  WFC has other benefits which were mentioned here and I think other banks would have very hard time to duplicate in the long term.

 

[Kiltacular]

Regarding the first point, this seems to be a fact that cannot be denied.  It surely did not get there by luck, (I'm agreeing and repeating what you said.)  I don't think it's about volatility at all as another poster suggested, it's about risk and higher quality business reduces the risk combined with the following:

 

Regarding the second point, I disagree.  Corporate culture is very hard to change in such huge companies, WFC has proven what it is.  The great thing about the recent crash is that it was a test which allowed us to see who is what and who is not.  WFC has other benefits which were mentioned here and I think other banks would have very hard time to duplicate in the long term.

 

meiroy,

 

You could also be right on your second point.  It's difficult to tell at this point. 

 

Wells used to have an advantage because it could keep (retain) deposits without paying up for them as compared to many competitors.  This fact made it clear that Wells had a moat and that, for whatever reason, some large portion of depositors were willing to forgo the higher rates available elsewhere and continue to bank with Wells -- was the reason the cross-selling (my guess), was the reason perception of safey, customer service.  I don't know but I know they had a big advantage.  Today, since interest rates are zero on demand deposits, we can't tell if the other "big bank oligarchs" will be forced to pay up in order to retain deposits once interest rates are raised again.  And, if Wells does still have an advantage here, will they be allowed to get way above the 10% of U.S. deposits they've already got?  If so, how high?  Again, my point was that a lot of things have changed since the meltdown and the (new) concentration of banking deposits in so few institutions.

 

The concentration of deposits in BAC, Wells and JPM is simply enormous today.  Large corporations don't have nearly as many choices as they used to.  Perhaps Wells has lost an advantage here over its competitors because there are just fewer options. 

 

We'll know more in the future.

 

This is but one example -- though I think it is the most important question relating to the unknown permanence of their advantage since the meltdown.  Post meltdown (and bank [deposit] consolidation), we have not yet seen what NIM's will look like at the new "oligarchs" when rates on demand deposits are, say, 2%.  If Wells is both shows an advantage here and, importantly, is allowed to keep it (by regulators), then I think we can say again that Wells deserves a premium value to its large competitors.

 

In addition, as you say, corporate culture is hard to change and WFC -- at this point -- appears to have other advantages as well.  Cross-sell may be easy but we'll see how good the others get at it.  Too, will BAC be able to regain a significant part of the mortgage origination market?  Again, we'll see.

 

I'm in the camp that looks forward to the day that BAC's valuation moves up towards a Wells or even a U.S. Bank (someday!).

 

So, I tend to think there's also room for agreement with you from my perspective.  Much of this is up in the air.

[Kraven]

  We can just agree to disagree on this specific point -- which was the only point I thought we were originally debating.

 

Done.  Agreed.  No worries, my friend.

 

Separate from this point, I was thinking about the purported moat and stickiness of Wells Fargo's deposits.  I am a firm believer that most of banking is commoditized and that most commercial banking products are fungible.  So what would cause someone to keep their deposits at Wells even for less interest?  It could be perceived safety, although for most people the FDIC guarantee is more than sufficient.  Although I have no facts to back me up, I would think that most people who have more than $250k just sitting in the bank are also sophisticated enough to explore other options.  Now that option may be just throwing it into an index fund or an annuity or something, but it's still something.

 

I did a thought experiment.  I wanted to think about how many banks are within a few miles of my house (which is in the suburbs).  I stopped counting at 12.  This includes everything from Wells Fargo, Sun Trust, Bank of America, Citibank, PNC, Capital One, BB&T and M&T to at least 4 community banks.  With a couple exceptions (i.e. a branch buried in the bottom level of a strip mall with limited parking), none of these branches are really any more or less convenient than any other. 

 

So forgetting for a second community banks, I thought to myself why would someone keep their money with Wells Fargo rather than Sun Trust, Bank of America, Citibank, PNC, Capital One, BB&T or M&T?  Is it because it's more prestigious?  That can't be it.  While there was a point in time many years ago when it might have mattered, it certainly doesn't now and hasn't for a long time.  Is it because they offer better service?  Perhaps, although with the exception of certain relationship type business banking, is there really such a difference in service from one bank to another when you deposit a check or withdraw funds from a teller?  Kind of all the same.  We discussed branding before.  Do people identify with one bank over another?  Just like someone is a diehard Phillies fan or a diehard Yankees fan, is someone a "PNC Man" through and through?

 

Safety, as mentioned above, may have some bearing on it, but I was unable to come up with a real item that differentiates one bank from another except for pricing and convenience.  If someone has a savings account and checking account with Wells Fargo would they leave if Bank of America pays a little more?  I don't think so, but it's not because they are Wells Fargo people to the core.  It's because it's a huge pain in the ass.  You have to get new checks, change any kind of direct deposits or automatic withdrawals, etc.  While it's not painting the Sistine Chapel, it's the kind of chore that most people shy away from.

 

So as I said before, I believe that commercial banking isn't do no harm, it's do just enough to not piss people off so they leave.  In some ways all the banks thus have the same moat and no moat at all. 

[biaggio]

Kraven from my personal experience I think its because i. its a PITA, ii therefore we tend to procrastinate (especially those who have money tend to have other things they would rather do) iii the banks don t go out of their way to expedite things

[racemize]

One thing I'll pitch in here, I think most of us that were buying WFC were doing so at the 23-28 range rather than the current prices, so while there was a discrepancy in valuation between the banks, WFC had much better price appreciation prospects at that time.

 

Also, I'm on board with most of the comments on banks and switching.  I switched from BofA a few years back (god they were horrible, hopefully they have improved) to a local bank and haven't really looked back.  It was an extraordinary pain in the ass, exacerbated by me buying a home very soon thereafter. 

 

Just wildly speculating here, but I wonder what percentage of WFC or any bank's customers would potentially be affected by "cross selling"?  It seems like you have to have a decent net worth for there to be things to cross sell to you, no?  What are all the cross-sell products that you can do for an average person?  Banking+mortgage+credit card?  Anyway, it didn't work for me, I have separate companies for every different financial transaction type, though when I had BAC, I did use their credit card.

[txlaw]

One thing that hasn't been discussed is the benefit of having financial accounts accessible through one UI.

 

I have a BofA account, and I recently got a cash card from BofA to replace my Citi cash card because it's just easier to keep track of everything through one interface and because cash back is deposited directly into my bank account.  No hassles at all.  If the Merrill Edge interface were made more user friendly and more akin to a Schwab or Etrade, I bet a bunch of people would move their money there.  So that's something to look out for in terms of deposit stickiness/cross selling. 

 

I wouldn't get a mortgage from BofA, though, as it's really known to be a PITA at this time and I doubt I'd be able to get a lower rate than with some other local banks.

[meiroy]

 

txlaw,

 

I think the main point is what you wrote previously "low-cost nature".  Their advantage is in the numbers.

 

racemiz,

 

personally I bought the common at the lows and than traded over to the warrants, did this a couple of times.  I also own BAC (common and warrants) just put the two in two different investment/trading categories.

 

Either way listening to the conf call today should be fun! yay.