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Now We Know Why Thain Was Smiling

January 17, 2009 | About:
Tom Lindmark

Tom Lindmark

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Ken Lewis, the CEO of Bank of America(BAC), was named Banker of the Year by the American Banker in December. Today it was announced that the federal government was going to inject billions more into Bank of America to keep it alive. The ostensible reason for this bailout is that Bank of America was blindsided in its acquisition of Merrill Lynch.

lewis-and-thain.jpg


Here is a brief compendium of statements from Ken Lewis, the CEO of BofA.

From Portfolio.com

On the Merrill Lynch asset assumptions when the deal was struck:

Lewis: “The numbers that we presented today, we had considered marks on the assets as well as planned actions that Merrill Lynch has either executed or had in the works during the quarter as they continued to make progress in risk reduction. So those have been done…So again back to the earlier point, we’re pretty familiar with the types of assets and feel pretty good about the progress that Merrill Lynch had made itself.”

“Many strong companies have fallen victim to this environment while others have capitalized on opportunities as they have presented themselves. Merrill has been a strong respected competitor in the market place that we know well, but the market continues to question the viability of the stand-alone investment bank. This transaction helps ensure Merrill Lynch can continue to operate effectively for the clients on enhancing the long-term value we can create for Bank of America shareholders.”

Thain: “I just want to add to Ken’s comments about what a tremendous strategic fit our businesses are here and what great opportunities we see for the future of this combined franchise.”


From the Wall Street Journal:

Bank of America shareholders who voted for the Merrill Lynch purchase must be feeling a mix of emotions right now. Among them: anger.

On Dec. 5, holders voted for the deal, which was initially announced during September’s Lehman Brothers crisis. On the day of the vote, Chief Executive Kenneth Lewis said BofA would have “the premier financial-services franchise.”

When the deal closed Jan. 1, Mr. Lewis was still positive, saying: “We are now uniquely positioned to win market share and expand our leadership position in markets around the world.”

What shareholders weren’t told: From mid-December, BofA executives were discussing with the Treasury possible extra aid to support the Merrill deal.

Since Merrill was going to be a big part of BofA, and since government aid often hurts the interests of common shareholders, investors can feel aggrieved that they weren’t told what was going on behind the scenes.

The Treasury also has some explaining to do. Its bank rescues have been criticized for lacking transparency. Dealings with BofA over Merrill look downright opaque.


Can anyone offer a compelling reason why Ken Lewis and his management team shoud not be summarily replaced and why a wide ranging investigation of their actions with regard to this merger and other actions should not be undertaken by the SEC and other relevant authorities?

By Tom Lindmark, www.butthenwhat.com

Rating: 4.7/5 (6 votes)

Comments

crafool
Crafool - 5 years ago
I completely agree that Ken Lewis and obviously the rest of his management team should be immediately replaced. Ken Lewis as little as a couple months ago appeared on 60 Minutes in the most pompous manner. Proudly he allowed the interviewer to stroke his ego with suggestions that he had stalked Wall Street and bagged his prize soundly defeating his rivals. It is clear he hasn't a clue as to the responsibilities of his job. In case he and obviously his Board of Directors do not know his chief responsibility, I will tell them. (Full disclosure: It is actually Warren Buffett's definition of a bank CEO's responsibility.) Mr. Lewis, AS CEO YOU ARE TO BE THE COMPANY'S CHIEF RISK OFFICER. Plain and simple. The mere fact that BofA has had to go under the wing of the US Government and now has a market cap of less than its estimated future write offs and loan losses indicates this bank is "Insolvent" and management should be replaced immediately and placed into the same conservator relationship with the Federal Government as Fannie and Freddie.

Mr. Lewis, who just recently felt he should still receive his MULTIMILLION DOLLAR bonus, appears to be naive enough to believe that he should be given a pass for as he characterized it "a deterioration in the assets that no one (his team) could imagine". Another shout out to Mr. Lewis, when you pay $20 billion dollars for a company you should be able to look around every corner and understand the outcome. Do you realize $25 Million dollar plus salary and bonus does not allow you to ask for any understanding from the Board or especially shareholders (who have lost solid wealth and now have been embarrassed by having their income put into the penalty position of 1 penny a share. By the way Mr. Lewis, the 1 penny is a symbol to the preferred shareholders, U.S. Government and their newly acquired 8% yielding preferred that their dividend is secure, and not any victory you earned for them for as long as the common shareholders receive 1 penny the preferred a entitled to receive their FULL dividend.

Mr. Lewis, you and your team not only have failed in your latest ego boosting acquisition by not adequately quantifying the risks associated with the Merrill Lynch acquisition, you are also demonstrating by the mass exodus of top talent that you haven't a clue regarding the business of investment banking either and thus are reducing the multi-billion dollar blunder into a COMPLETE miss-allocation of capital that rivals Disney's Michael Eisner's purchase of ABC (I don't believe you are luck enough to have a hidden gem like ESPN to bail you out).

Mr. Eisner, your pompous ego has you (remember all your pronouncements about the stability of your dividend? Even Meredith Whitney of Oppenheimer was fooled by your foolish proclamations of its solidity)and your overly estimated abilities "snake bite" or is it just something in the North Carolina water?

Mr. Lewis is acting right now like his past colleague none other than Mr. Kennedy Thompson of Wachovia. Banker of the Year, what a joke. I believe it is time for Mr. Lewis to do one thing right, and that is to fulfill his "Fiduciary Responsibility" to the shareholder's of Bank of America, and RESIGN ASAP and offer back any compensation received and drop any claim to any future compensation for he has put this company into an "Insolvent" position. The Board of Director of Bank of America should begin immediately in fulfilling their "Fiduciary Responsibility" to shareholders by beginning the procedures for letting Mr. Lewis go as well as other members of his management team and beginning the search process for finding his replacement, immediately. Mr. Thain should be let go as well for it is his company that has put BofA into the toppled position (of course, the latest earnings report did show BofA had $25 BILLION of its own problems, so to a degree Mr. Lewis is using Merrill for some cover over his other problem areas. Way to go, Ken!!!).

Banker of the Year!!! Maybe next time they give the award they look past the plastic, flashy and pompous toward the the reserved and methodical like the "Boys at Wells Fargo".

Good Luck to all, and to Ken Lewis there is another loser in Charlotte for you to hang with to help you cope with your massive failure. You know him well. Give Kennedy Thompson a call. Two losers like you belong together.

CRAFOOL

crafool
Crafool - 5 years ago
Correction: 4th paragraph down. Mr. Eisner should have read Mr. Lewis.
crafool
Crafool - 5 years ago
I completely agree that Ken Lewis and obviously the rest of his management team should be immediately replaced. Ken Lewis as little as a couple months ago appeared on 60 Minutes in the most pompous manner. Proudly he allowed the interviewer to stroke his ego with suggestions that he had stalked Wall Street and bagged his prize soundly defeating his rivals. It is clear he hasn't a clue as to the responsibilities of his job. In case he and obviously his Board of Directors do not know his chief responsibility, I will tell them. (Full disclosure: It is actually Warren Buffett's definition of a bank CEO's responsibility.) Mr. Lewis, AS CEO YOU ARE TO BE THE COMPANY'S CHIEF RISK OFFICER. Plain and simple. The mere fact that BofA has had to go under the wing of the US Government and now has a market cap of less than its estimated future write offs and loan losses indicates this bank is "Insolvent" and management should be replaced immediately and placed into the same conservator relationship with the Federal Government as Fannie and Freddie.

Mr. Lewis, who just recently felt he should still receive his MULTIMILLION DOLLAR bonus, appears to be naive enough to believe that he should be given a pass for as he characterized it "a deterioration in the assets that no one (his team) could imagine". Another shout out to Mr. Lewis, when you pay $20 billion dollars for a company you should be able to look around every corner and understand the outcome. Do you realize $25 Million dollar plus salary and bonus does not allow you to ask for any understanding from the Board or especially shareholders (who have lost solid wealth and now have been embarrassed by having their income put into the penalty position of 1 penny a share. By the way Mr. Lewis, the 1 penny is a symbol to the preferred shareholders, U.S. Government and their newly acquired 8% yielding preferred that their dividend is secure, and not any victory you earned for them for as long as the common shareholders receive 1 penny the preferred a entitled to receive their FULL dividend.

Mr. Lewis, you and your team not only have failed in your latest ego boosting acquisition by not adequately quantifying the risks associated with the Merrill Lynch acquisition, you are also demonstrating by the mass exodus of top talent that you haven't a clue regarding the business of investment banking either and thus are reducing the multi-billion dollar blunder into a COMPLETE miss-allocation of capital that rivals Disney's Michael Eisner's purchase of ABC (I don't believe you are luck enough to have a hidden gem like ESPN to bail you out).

Mr. Lewis, your pompous ego has you (remember all your pronouncements about the stability of your dividend? Even Meredith Whitney of Oppenheimer was fooled by your foolish proclamations of its solidity)and your overly estimated abilities are "snake bite" or is it just something in the North Carolina water?

Mr. Lewis is acting right now like his past colleague none other than Mr. Kennedy Thompson of Wachovia. Banker of the Year, what a joke. I believe it is time for Mr. Lewis to do one thing right, and that is to fulfill his "Fiduciary Responsibility" to the shareholder's of Bank of America, and RESIGN ASAP and offer back any compensation received and drop any claim to any future compensation for he has put this company into an "Insolvent" position. The Board of Director of Bank of America should begin immediately in fulfilling their "Fiduciary Responsibility" to shareholders by beginning the procedures for letting Mr. Lewis go as well as other members of his management team and beginning the search process for finding his replacement, immediately. Mr. Thain should be let go as well for it is his company that has put BofA into the toppled position (of course, the latest earnings report did show BofA had $25 BILLION of its own problems, so to a degree Mr. Lewis is using Merrill for some cover over his other problem areas. Way to go, Ken!!!).

Banker of the Year!!! Maybe next time they give the award they look past the plastic, flashy and pompous toward the the reserved and methodical like the "Boys at Wells Fargo".

Good Luck to all, and to Ken Lewis there is another loser in Charlotte for you to hang with to help you cope with your massive failure. You know him well. Give Kennedy Thompson a call. Two losers like you belong together.

CRAFOOL

batbeer2
Batbeer2 premium member - 5 years ago
>>... Can anyone offer a compelling reason why Ken Lewis and his management team shoud not be summarily replaced .....

>> ... www.butthenwhat.com ...

But then what ?
crafool
Crafool - 5 years ago
But then what?

After terminating Mr. Lewis, I would suggest that the Board of Directors immediately form a joint committee with the U.S.Government and hire consultants like James Grant of Grant's Interest Rate Observer that seeks out management that truly understands banking.

Today's bankers work with a "herd" mentality. He/she offers loans only in the most competitive environments at ever lower rates and easier and easier terms, and then surprise to the banker and his/her fellow members in the herd the "business cycle" returns as the excesses of careless underwriting necessitates a collapse in order to remove the excesses of the system, and the entire herd stops making loans. The bankers swing their attitudes toward underwriting from complete ineptness toward credit risk toward being totally petrified of it. They will have a list as long as a mile justifying their actions but it really comes down to just being part of the herd.

A true banker never sacrifices his underwriting principles especially to just win a loan. In fact a true banker understands that during periods of intense competition, it is best to lose the business than to lower ones rate or standards to win it. In banking, your balance sheet and ability to lend are the most important thing. If you damage one you can not do the other. Thus, a true CEO has to constantly monitor for the risks out there and be prepared for the unexpected. A great analogy is James Grants "Contra-Bank". It is a banker that only lends when others will not for his terms will be favorable and profitable to the bank, and his customer thankful for his willingness to lend when others would not, and this banker would know the optimum time to begin lending when other bank loan officers start arriving at his door products of the latest layoffs at the "herd" banks. The bank would always keep his rates and standards high, and eventually some of his customers would leave once the "herd" banks no longer fear their shadows. He does not want to see them go but he realizes that the only way he will be there when truly needed with a strong balance sheet and ability to lend is during the next inevitable down turn in the economy for it will come for there will never be an end to the business cycle.

We need real bankers in this country. There are a few (i.e. Wells Fargo, Jamie Dimon, and probably more than a few in the local community bank area for many of these are family controlled and those make for some really sensible bankers) out there. Bankers should have claw back bonuses and a significant percentage of their income should be put into a deferred compensation sort of arrangement so they aren't writing loans for bonuses. We all benefit from a solid banking system. These bankers today want bonuses and aren't willing to lend? They won't lend when the risk and reward is probably the best its been in 10 years. How do they call themselves bankers? Followers is more likely.

Great investing to all.

CRAFOOL
Sivaram
Sivaram - 5 years ago
Crafool,

What makes you think Jim Grant knows how to run a bank in a fiat currency system? I think Grant would die if he had to consult for the government (that's a dig at Grant's views if you are familiar with him ;) Ok, I do like Jim Grant and think he is one of the top financial thinkers in America but come on. These are system-wide problems. I don't have any interest in BAC but my feeling has been that it is better run and safer than most others. I don't know if you are shareholder in these banks but I find it curious that people who are critical of the executives, not that I'm saying they didn't make massive mistakes, never seem to blame the shareholders. Was it not the shareholders that pushed and rewarded management to pursue the past policies? Was it not the shareholders who made billions in profits over the years (needless to say, returns on capital that shareholders in other industries would have loved)?

The fact of the matter is that we are facing a crisis of capitalism. Contrary to how some blame the government or the central bank or the executives, the reality is that everyone involved was supporting the system. This includes the shareholders. It's not one bank; it's not the executives; it's not the central bank. It's everyone. I wish it were just one bank or a few people but it's not. The current financial crisis is a disaster of epic propotions. I mean, practically all the British banks may end up being nationalized! And maybe all the American megabanks will be nationalized as well.

You have positive opinion of Wells Fargo and Jamie Dimon but I'm really wary. So far losses have been limited in the derivatives arena, but if losses escalate, JP Morgan will be looking at a similar fate as Citigroup. Wells Fargo, although better run and supposedly stronger balance sheet (I don't follow banks and they are all opaque anyway so I don't know,) is rumoured to be understating losses. One technical analyst was speculating that the recent sell-off in these shares is not the typical shareholder selling but is due to short-selling. If so, knowing that short sellers usually have a reason for targetting certain companies, there may be more bad news.

Anyway, to sum up, Ken Lewis still seems to be a good banker, along with others like Jamie Dimon. But the problem is that there are all these macro problems and huge mistakes in the past that are hurting. As batbeer asked above, if you dump the executives at BAC can you actually find someone better? And no, the government cannot run these companies any better (however, the government can patch up problems by throwing money on top of them.) As for me, after my disastrous "experience" with Ambac, a bond insurer, I'm staying away from financials. There are all these ticking time bombs everywhere...
crafool
Crafool - 5 years ago
Sivaram,

You have me perplexed it seems that you support Mr. Lewis and call Bank of America, a better run and safer bank than most. Just how do you arrive at that sort of statement? Is it that they are under the just "too big to fail" umbrella and thus have the benefit of size and place? That has absolutely nothing to do as to whether they are good bankers. In fact, it is more of an indictment of lack regulation? Mr. Lewis pushed the envelop and lost. Was he trying to maximize his bonus? I think most likely as well as i believe his pompous attitude and ego were definitely involved as well.

Wow, you shareholder comment to paraphrase nobody blames them. Just seems like wow! I mean, Wow. No, I really mean Wow!!! From what position do you come from? Justifying management' destruction of a company for he was trying to maximize his compensation under his compensation/bonus structure is not an excuse for destroying a company worth as relates to shareholders, employees and customers. It comes down to his Fiduciary Responsibility to all three groups. He is the top guy, as his pay and ego clearly show. He should be able to see around corners to clearly state were the company has gone wrong including compensation plans that reward him for pushing his company over the edge as he has clearly done. I will reiterate that when a stocks market cap is less than its projected write-offs it is no long a going concern in the real world, but only under the wing of government assistance. By the way, I did call for the Board to be equally disciplined and that is why government assistance and a consultant like Jim Grant who knows risk should be a part of the process. By the way, I DO BELIEVE GRANT COULD RUN A BANK. I definitely believe he could do a WAY better job than the pompous and inept Mr. Lewis for all Mr. Grant would need to do is keep the bank out of bankruptcy/insolvency. By the way, as a reader of Grant's you to are aware that he called the majority of this credit crisis including the most important part "securitized sub-prime mortgages" and "Housing bubble", I ask you do you think Mr. Lewis could look at any of that "toxic paper" and understand it? Most like over his pay grade, but of course his pay grade is way over him.

As far as the spread in banking, did I not say we lack proper bankers and instead have a 'herd" mentality. If everyone did the same dumb thing than don't you expect the same results? I know I do. I believe a new set of bankers needs to be brought on board (Note to Bank Board of Directors: You have to go well down the ladder to get these types for the others are to well ingrained) that think about "absolutes" and not "relatives". Thought about the bank which includes it shareholders, employees and customers should determine your actions and not your competitor.

As far as the tail of the shorts on the likes of Wells Fargo, I do believe the shorts are taking their best shots at the banks and rightly so. The most favored instrument for the shorts in establishing their positions is without a doubt the Bank/Financial ETFs and in each index WFC is heavily weighted. Thus, it should be going down just like and more than the other banks. As far as warranted action, I don't know my guess is most likely not. I don't believe in totally efficient markets but only in mostly efficient markets. We are in a time when the markets are not acting efficiently for the number of participants has shrunk dramatically and this increases the volatility of the market and companies in general.

Could there be rumors about Wells Fargo not adequately stating losses be true? I don't know and neither do you and most likely the person that started it for the rumor isn't there to help but most likely promote the rumor starters own agenda (i.e. a competitor, short-seller, jaded customer, etc.)and not likely the benevolent seer looking out for the good of all. I will say that integrity and character aren't created overnight and generally don't change over night. Additionally, I generally believe that smart people generally stay smart. I am willing given no cause to doubt that Wells Fargo is a straight shooter, but that is just my guess and maybe I am naive but they've shown no reason to doubt them. I do believe you have some smart guys at the helm, and full-disclosure I am basing some of my opinion on Warren Buffett's opinion and association with them. Generally speaking, Warren Buffett has been "hood winked" that often, so I am willing to roll with him on this one. I am a shareholder in Wells Fargo and no other banks for I do believe they are truly exceptional but not immune to all the damages of this financial crisis, but I believe they will not only survive but thrive in the years to come. I do believe we will have a financial industry in this country and if I have to place a bet on one company it is Wells Fargo. Did I buy at the low? No, but at the price paid I believe the value will be far higher three- to five-years than today. Remember, Recessions are hard on EVERYONE, but especially on the weak. The weak (In my opinion, Citi. and BofA) could go out of business and that leaves the strong banged up but ready to thrive once the economy returns to normalcy, and it will.

Sivaram, I just have a general rule: If a CEO takes a company into bankruptcy/insolvency, I general put him into the suspect column on abilities. I definitely don't try and ride with him for the first ride seems a bit to bumpy for my liking.

Good investing to all.

CRAFOOL
batbeer2
Batbeer2 premium member - 5 years ago
Take AIG for example. AIG should have refused to take some of the business that it did. Can you imagine the noise shareholders would have made if the AIG CEO in say.... 2004 had blandly stated that he could not get his head around those complex derivatives and would not subject this great company to something he did not understand.... That would have been an interesting career move.

It is rare event for an investor to praise management for increasing the value of his/her investment while avoiding risk. Gains are the result of brilliant stock-picking abilities. Loosing money on the other hand must be someone elses fault.

The CEO works for you. If the CEO wasn't good, you should have hired a better CEO. If the CEO doesn't work for you, don't own the company. You feel the system sucks and you are being ripped off by the guys calling the shots, you shouldn't be buying stocks in the first place.

Rule #1

Don't get yourself into a situation where you can loose money without knowing why.
Sivaram
Sivaram - 5 years ago
Crafool,

I don't have access to Grant's but he did call the credit bubble. But the BAC situation is quite different. I think your comments would apply to, say, Citigroup or UBS or Royal Bank of Scotland.

Bank of America's problems come from its decision to acquire Merrill Lynch and Countrwide. There is little to indicate that BAC's core operations (excluding these acquisitions) were run poorly. In contrast, the competitor megabanks actually had poor operations, with Citigroup and others loading up (or providing loans) on dubious assets.

There is nothing to indicate BAC is insolvent. Unlike many others, it was, and maybe is, fine (I don't follow the bank that's my impression.) Its latest problems are arising from the buyout of Merril Lynch. BAC was going to back out of the deal as recently as December but the govt recommended that it go ahead, in return for govt support in the future. Ken Lewis should have maybe backed off and let Merrill Lynch collapse but the merits of the actual decision won't be known for quite some time.

In contrast, the vast majority of competitor megabanks that are having problems have toxic assets on their books. Past, and in some cases present, management were acquiring those assets, or issuing loans, which turned out to be almost worthless. My impression is that BAC did not acquire such assets in the past. Instead, it only acquired them through the takeover of Merrill Lynch (and Countrwide.)

It's difficult to say for sure but it seems unlikely that Merrill Lynch or Countrywide will bring down BAC. Sure, it can happen but the possibility seems remote. Instead what may happen is that BAC may need to absorb huge losses. Maybe you are right and BAC is insolvent but until it is obvious, all this looks like a risky acquisition with good potential.

-------------

I bring up shareholders, not to insult you, but to point out that it is them--and us--who were pushing management to do some of these things. It is the shareholders that rewarded management. I mean, why did all these executives get paid tens, and in some cases hundreads, of millions in the last decade for running these companies? John Thain, for example, received (up to) $70 million just for taking over Merrill Lynch (and given the collapse in those shares, I doubt it was worth that $70 million.) You could have the "best bankers" in the world but as long as shareholders keep rewarding executives like this, I will argue that the end result will be the same.

------------

Good luck with your WFC investment. Bears say WFC may be under-reserving losses but it remains to be seen. My feeling is that nearly all the megabanks may end up being nationalized in the end. I'm not sure about WFC but others would already have been bankrupt if it weren't for the government, so why should taxpayer money be given away for free to these banks?
crafool
Crafool - 5 years ago
Sivaram,

For someone who couches their comments with "I don't follow the banks" you are very impassioned and very quick to position oneself as someone of knowledge regarding them. Declare your position and stop this pandering. By the way do you know James Grant or not? Again, you talk with authority but then run form it. Be clear with your points.

There is ABSOLUTELY no difference between Mr. Lewis inept decision to purchase Countrywide (remember transaction took two phases the first was a huge investment for a minority stake that many see as causing Mr. Lewis to buy the whole thing to save face), and now the Merrill Lynch shoot from the hip decision that has sunk the ship. The little to indicate that Bank of America has done the same is the MANY MANY billions of dollars of write downs from its investment banking (remember Mr. Lewis laid off the majority of his investment bankers and now goes and buys Merrill Lynch and its bankers. Go figure?) to the latest $25 billion of BofA's OWN (Not Merrill Lynch's) write offs.

Nothing to indicate they are insolvent? They have effectively been nationalized. Again, the mere fact that their future losses/write downs exceed their market capitalization is a pretty clear signal that they are bust. Of course they are to big to fail, and thus a complete takeunder is not going to occur, but I wouldn't hang my hat on that when defending Mr. Lewis "Banker of the Year" and his equally inept Board of Directors and management team. Remember Kennedy Thompson of Wachovia only made one bad decision like buying "Golden West" with its toxic portfolio of option arms. It isn't the number of mistakes, but the quality and Mr. Lewis has hit a Doozy with the Merrill Lynch acquisition and Countrywide.

As far as a "risky" acquisition with good potential, Psst, Mr. Lewis in an effort to raise very much needed cash in a desperate bid to stabilize his VERY VERY cash strapped business appears ready to destroy his newly acquired business by alienating the "Crown Jewel" of 17,000 financial consultants with a joke of a retention package (Big error)and substandard compensation plan (Even bigger error). How do we know? The top talent of Merrill Lynch (I mean real talent, John Thain is an outsider with as much credibility with the "Thundering Herd" as Mr. Lewis) has and is leaving in droves. The pace of departures from 17,000 will quicken through out the year is my guess. Why stay? To just explain the bank/firm is a ward of the government? (Note: recently the comment from Smith Barney and Morgan Stanley management that there will be a retention package for their financial consultants, "We've been in this business a long time and there will be a retention package . We aren't stupid". I believe Mr. Lewis' call of offering only half the consultants a package might be described accurately as "stupid".)

As far as the shareholder comment, I believe they should be directed at mutual funds and institutional investors for it is they who can get the boards attention, except they choose not to and elect to show their disapproval with the whole "withholding" a vote thing followed by they just sell their shares.

Thank you for your best wishes and I extend mine to you with BofA. I guess I'll know whether the rumors are right. Right now the easy trade is to be bearish and negative on all the banks. That generally spells opportunity. I mean I can not see how anyone says that WFC is under-reserving when according to the November 6th of 2008 edition of Financial Times has the article written by Saskia Scholtes titled "Wells Fargo to Sell $10 billion in Stock" reported that Wells anticipates $36 billion in charges on Wachovia Bank's $118.7 Billion in option arm portfolio or basically 30% and a total of $71 Billion on its $482.4 Billion total loan portfolio or around 14%. I wouldn't say that was under-reserving, but I could be wrong. Those short-sellers in the momentum trade generally replace fact for rumor. Another part of the article states that the $25 billion in TARP money will not be needed for the Wachovia deal according to WFC management (I have no reason to not believe WFC management is not forth right). Of course, its easy to call all bankers liars, except it seems odd you don't seem to give WFC the generous benefits you afford to Mr. Lewis. I guess the Wells Boys will show their stuff early Wednesday before the open. I remember the burst off the July stock market lows were ignited by Wells Fargo showing a profit and not a loss like all the other banks and analysts were calling for at the time. Could this be a similar set up? The Wells Boys seem pretty content not to speed up reporting. These guys are pretty cool customers. Disciplined, methodical and patient as evidenced by their stalking of Wachovia for years, bagging their game and getting paid for it to boot. I think American Banker will be spending a lot of time in San Fran next year getting to understand banking and how to do it. You know what I mean.

But until then, I just keep thinking about the $40 billion in write downs that Wachovia already took in goodwill and other write downs that thanks to the tax loop holes put into the TARP by Hammering Hank should spell about $19 billion in tax credits for WFC going forward (Think about it they bought WB for $16 Billion in STOCK and received $19 billion in tax credits (CASH) from the estimated total $71 billion in losses.). I don't think WFC has to worry about paying taxes any time soon.).

Let's see if Wednesday has any surprises? Good luck with BAC.

Good investing to all.

CRAFOOL
softdude2000
Softdude2000 - 5 years ago
Crafool,

Looks like you did some study on banks, WFC in particular. Can you say why WEB likes WFC so much? I want to know something more than "good management".

Thanks
fk
Fk - 5 years ago
http://www.tradingmarkets.com/.site/news/Stock%20News/2133350/

this recent article on WFC details some of what Crafool was saying. 97% of wells mortgages are performing in California, the Wachovia deal is going to save them more in taxes than what they paid to acquire it. I accumulated some more WFC today.
crafool
Crafool - 5 years ago
Softdude2000,

Bank management is no small thing when it comes to banking as we are all seeing what inferior and inept managements (i.e Wachovia, Bank of America, Citibank, etc.) can do to these institutions. Banks are a commodity business were price dictates their business (most bankers will not admit this.), and very risky businesses for leverage is their business (how to manage this is where the tire meets the road and distinguishes the true bankers from the imitators and down right idiots, Mr. Lewis). So pay very good attention to the management for they are the chief risk managers and ultimate determent of survival and success.

That said, recessions are extremely difficult on everyone and generally all get hit, but they are especially hard and even deadly for the weak, mismanaged and inept for it will kill them/put them out of business or in a GREATLY HOBBLED state. Thus, if you are a strong bank like Wells Fargo you can thrive once everything returns to normal. In a commodity business, you are held captive by the practices of your dumbest competitor (think about home many loans Wachovia, Citibank, Countrywide, New Century,etc.) took from Wells Fargo. Wells Fargo showed discipline by forgoing the impulse to follow the "herd" into writing sub-prime loans, and instead chose to focus on just acting as a servicer and trustee of these loans and received revenue for doing it without credit risk. They decided that the risks of lending and holding the mortgages was not adequately rewarded. They understand that their servicer revenue would likely decline later when the market goes into default/refi-ing however at that time the competition that is either impacted or no longer around will allow them to get the best risk/reward ratio for engaging in lending and holding the assets. Again, they will not lend under highly unreasonable terms and will lend when their is no significant competition. Thus, their margins will be larger than the majority of the peers with a generally lower loan loss experience, and that is two of the four main ingredients for a successful and thriving bank.

The other is mind share. Wells Fargo ability to continue to lend when others can not should translate into people understanding it is generally more important to have a relationship with a stable "real bank" than with a bank one can not be confident will be around if the going gets tough. That mind share position is very powerful for it allows for Wells Fargo to gain premium pricing.

Lastly, it is all about location, location, location. Wells Fargo with its newly acquired Wachovia branches has I believe the largest branch network coast-to-coast and proximity to customers is a distinct advantage. I believe with Bank of America and Citibank on IVs in the ICU taking oxygen from the U.S. Government, it leaves the door wide open for "Wells Fargo to take the position of being Main Street America's have to have a relationship with bank just out of prudence and convenience".

Four reasons I believe banks are successful and Wells Fargo fits the bill.

Bye the way, Wachovia's option arm Pick-a-Pay mortgages though characterized as sub-prime and I am not denying it, but there is in my own personal opinion a big difference than their sub-prime loans and those of say Merrill Lynch, Citibank, JP Morgan, BofA, etc. is that they DO NOT OWN THE SECURITIES BUT THEY OWN THE OUTRIGHT LOAN. Why is this important? Generally the security does not allow the holder to negotiate terms with the defaulting homeowner and thus very hard to work with and a major issue for most banks. Wells Fargo knows who has the loan and has the ability to work directly with them for everyone's benefit not the least themselves and their loan loss/foreclosure experience.

Finally, I guess we will see if any of this amounts to a hill of beans for WFC reports in the morning. Maybe those rumors Sivaram talked about come true?

Hope this helps, and happy investing to all.

CRAFOOL

kfh227
Kfh227 premium member - 5 years ago
Thain resigned today. Apparently after BAC refused his request for a $10M bonus. BAC refused the request because Thain hid the problems within MER.

[url=http://www.marketwatch.com/news/story/thain-resigns-bank-america/story.aspx?guid={68B22C8E-B3A9-45BD-8345-6575EC9A9DA1}&dist=msr_2]Source to below[/url]

Thain resigns from Bank of America

SAN FRANCISCO (MarketWatch) -- John Thain resigned from Bank of America on Thursday after the giant lender lost confidence in Merrill Lynch's former chief executive.

Bank of America Chief Executive Ken Lewis flew to New York to talk with Thain on Thursday, and they mutually agreed "that the situation was not working out" and that he would resign, said Bob Stickler, a spokesman for Bank of America.

A successor who will run Merrill will be announced "shortly," he added.

BAC lost confidence in Thain after he failed to tell the bank about mounting losses at Merrill late last year. Merrill lost more than $15 billion during the fourth quarter, forcing Bank of America to ask the government for billions of dollars in extra support to close its acquisition of the brokerage firm.

Thain asked the Bank of America board for a $10 million bonus but then withdrew the request when the directors resisted. Thain's departure comes less than a month after Bank of America closed its purchase of Merrill.

"It's important for people to understand this was a change of leadership, not a change in the direction of the business," Stickler said. "We're very happy with how the business has performed since the acquisition closed on Jan. 1."


Wow, does this mean that BAC is one of the few companies out there with a BOD that has a spine?

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