The long weekend following the melt-up in financial stocks last week gave me some extra time to read and reflect. Much of what I read this weekend I found either interesting or outrageous. Here’s a random selection:
1. The Street’s reaction to Wells Fargo’s earnings preannouncement.
If bull markets do indeed climb walls of worry, the widespread skeptical reaction to Wells’s preannouncement of strong first-quarter earnings can only be encouraging. Nobody seems to be willing to take the numbers at face value.
Richard Ramsden of Goldman Sachs told Barron’s, for instance, that “several critical pieces of information were missing, including asset quality and securities exposure.” Well, yes, Richard, that’s true. This was a pre-announcement. If all the information about the quarter were available, they’d call it an earnings “announcement.” But it’s never too early too assume the worst, apparently. Ramsden is so committed to being negative on the group that that I predict that once the full earnings report is released next week, he’ll react much like ISI’s Ed Najarian, who commented that the “results not sustainable.”
I have yet to see any comments from the two analysts with the lowest first-quarter estimate for Wells. That would be Meredith Whitney, who expected earnings of 6 cents per share, and Mike Mayo, who was looking for 8 cents. (The company, recall, says it will report 55 cents.) Then again, both Mayo and Whitney are in the midst of high-profile job changes; maybe they hadn’t had a chance to update their models. Regardless, I’ll be interested to hear see their revised take on Wells once they get settled.
More interesting than the sell-side’s reaction to the Wells news has been the pundits’ reaction to it (and subsequent comments from readers) at the investment website SeekingAlpha.
The vast majority of commentary is either outright skeptical of the numbers, or holds the view that the results are not sustainable. Also, many writers are simply delusional. More than a few believe, for instance, that the better-than-expected results came about because of the recent change in mark-to-market accounting rules (even though the company’s press release specifically said the effect was insignificant). Others claim the strong numbers were due to the government’s $25 billion TARP investment in Wells. (In fact, that investment carries a non-tax-deductible 5% dividend, and thus costs Wells $312 million per quarter.) Still others predict it’s only a matter of time before credit losses overwhelm Wells and the rest of the banking industry. (On what specific evidence? None is offered). Others say the results are the result of sunspots and unexpected glacial movements. (Oh, wait. I made that up.)
One commentator on the Wells results was particularly telling. He’s a self-proclaimed value investor who’s consistently and publicly predicted losses for the U.S. banking industry that outrun what even Dr. Doom himself, Nouriel Roubini, has managed to come up with. But despite his semi-apocalyptic outlook, our man says he covered his Wells short at $10 and then went long the stock.
So this “investor” says he is holding the stock at $19 even though he’s just sure Wells’s results are unsustainable, and expects the whole system to come crashing down any quarter now. I, of course, doubt his Armageddon scenario. But so what? He doesn’t. And if he really expects it to come true, what the hell is he doing owning Wells before it reports huge quarterly losses?
2. Bloomberg’s Jonathan Weil continues to advocate that long-standing accounting conventions and securities laws be abandoned.
Weil is the least-rigorous financial journalist I know of. In his latest column, on April 9, he asks, “Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first?” He wants the government to “force the banks to write down their troubled assets first, as a condition of government assistance.”
Weil seems to not know that banks are continuously examined by several sets of outsiders, from regulators, to rating agencies, to auditors. Contrary to what he believes (and writes) banks don’t get to carry assets on their books at whatever value they wish. If Weil thinks otherwise, he should spend the next year uncovering what has to be the biggest regulatory and accounting fraud in the history of American enterprise. (I somehow doubt he’ll do that.)
Instead of relying on facts, Weil just makes up his own method of accounting to suit whatever angle he’s pursuing that week. In this case, he’s come up with a new rule that lets him declare that the big banks are insolvent.
Jonathan, if you have evidence banks are violating GAAP, bring it forward! If you have evidence that banks’ auditors aren’t doing their jobs, expose it! But I believe you’re being totally irresponsible when you claim the banks are insolvent because they’re not using some harebrained accounting policy you’ve dreamt up for the occasion. The banks follow GAAP. They have to. Their results are audited according to GAAP. They have to be. So if you think the banks are violating GAAP, I’m all ears. So, presumably, would the S.E.C. be. But if you don’t have any evidence, you should pipe down.
3. George Soros still wants to nationalize the banks.
Maria Bartiromo interviews Soros in the new Business Week. When she asks him when the recession will end, he says, “It will take time. The magnitude of the problem cannot be overstated. It is bigger than it was in the 1930s.” On the banks he adds, “It would be better to nationalize [the banks] than merely nationalize their debt.”
On the evidence, Soros’s view of the banking business is almost as unhinged as Weil’s. U.S. banks report their financial positions according to GAAP and are required to exceed three minimum capital ratios—Tier 1, Total Capital, and Leverage—that were set by regulators after many years of study and deliberation.
I don’t understand how people like George Soros can call for a sweeping nationalization of banks when the banks they want nationalized are operating with capital levels that greatly exceed minimum regulatory standards. Unless, of course, they want to do away with GAAP entirely, or propose criminally prosecuting all the major accounting firms for gross negligence. But I haven’t heard Soros push for either of those.
U.S. banks that do not meet minimum capital standards or otherwise violate regulatory agreements are (rightfully) seized by the FDIC—just as two were last Friday. The discussion about U.S. large bank nationalization is premature, at a minimum. At the very least, people should recognize that there are tremendous differences in the financial strength of the ten largest U.S. banks.
It sure will be an interesting next three weeks, as bank earnings reports are set to be released (There will be quite a variation in results among the big banks, I believe) and word of the results of the government’s stress tests are due. Meanwhile, the negativity surrounding banks in particular seems to be as thick as ever. I wouldn’t be surprised if, in the next little while, some minds start to be changed.
What do you think? Let me know!
Thomas Brown
www.bankstocks.com
1. The Street’s reaction to Wells Fargo’s earnings preannouncement.
If bull markets do indeed climb walls of worry, the widespread skeptical reaction to Wells’s preannouncement of strong first-quarter earnings can only be encouraging. Nobody seems to be willing to take the numbers at face value.
Richard Ramsden of Goldman Sachs told Barron’s, for instance, that “several critical pieces of information were missing, including asset quality and securities exposure.” Well, yes, Richard, that’s true. This was a pre-announcement. If all the information about the quarter were available, they’d call it an earnings “announcement.” But it’s never too early too assume the worst, apparently. Ramsden is so committed to being negative on the group that that I predict that once the full earnings report is released next week, he’ll react much like ISI’s Ed Najarian, who commented that the “results not sustainable.”
I have yet to see any comments from the two analysts with the lowest first-quarter estimate for Wells. That would be Meredith Whitney, who expected earnings of 6 cents per share, and Mike Mayo, who was looking for 8 cents. (The company, recall, says it will report 55 cents.) Then again, both Mayo and Whitney are in the midst of high-profile job changes; maybe they hadn’t had a chance to update their models. Regardless, I’ll be interested to hear see their revised take on Wells once they get settled.
More interesting than the sell-side’s reaction to the Wells news has been the pundits’ reaction to it (and subsequent comments from readers) at the investment website SeekingAlpha.
The vast majority of commentary is either outright skeptical of the numbers, or holds the view that the results are not sustainable. Also, many writers are simply delusional. More than a few believe, for instance, that the better-than-expected results came about because of the recent change in mark-to-market accounting rules (even though the company’s press release specifically said the effect was insignificant). Others claim the strong numbers were due to the government’s $25 billion TARP investment in Wells. (In fact, that investment carries a non-tax-deductible 5% dividend, and thus costs Wells $312 million per quarter.) Still others predict it’s only a matter of time before credit losses overwhelm Wells and the rest of the banking industry. (On what specific evidence? None is offered). Others say the results are the result of sunspots and unexpected glacial movements. (Oh, wait. I made that up.)
One commentator on the Wells results was particularly telling. He’s a self-proclaimed value investor who’s consistently and publicly predicted losses for the U.S. banking industry that outrun what even Dr. Doom himself, Nouriel Roubini, has managed to come up with. But despite his semi-apocalyptic outlook, our man says he covered his Wells short at $10 and then went long the stock.
So this “investor” says he is holding the stock at $19 even though he’s just sure Wells’s results are unsustainable, and expects the whole system to come crashing down any quarter now. I, of course, doubt his Armageddon scenario. But so what? He doesn’t. And if he really expects it to come true, what the hell is he doing owning Wells before it reports huge quarterly losses?
2. Bloomberg’s Jonathan Weil continues to advocate that long-standing accounting conventions and securities laws be abandoned.
Weil is the least-rigorous financial journalist I know of. In his latest column, on April 9, he asks, “Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first?” He wants the government to “force the banks to write down their troubled assets first, as a condition of government assistance.”
Weil seems to not know that banks are continuously examined by several sets of outsiders, from regulators, to rating agencies, to auditors. Contrary to what he believes (and writes) banks don’t get to carry assets on their books at whatever value they wish. If Weil thinks otherwise, he should spend the next year uncovering what has to be the biggest regulatory and accounting fraud in the history of American enterprise. (I somehow doubt he’ll do that.)
Instead of relying on facts, Weil just makes up his own method of accounting to suit whatever angle he’s pursuing that week. In this case, he’s come up with a new rule that lets him declare that the big banks are insolvent.
Jonathan, if you have evidence banks are violating GAAP, bring it forward! If you have evidence that banks’ auditors aren’t doing their jobs, expose it! But I believe you’re being totally irresponsible when you claim the banks are insolvent because they’re not using some harebrained accounting policy you’ve dreamt up for the occasion. The banks follow GAAP. They have to. Their results are audited according to GAAP. They have to be. So if you think the banks are violating GAAP, I’m all ears. So, presumably, would the S.E.C. be. But if you don’t have any evidence, you should pipe down.
3. George Soros still wants to nationalize the banks.
Maria Bartiromo interviews Soros in the new Business Week. When she asks him when the recession will end, he says, “It will take time. The magnitude of the problem cannot be overstated. It is bigger than it was in the 1930s.” On the banks he adds, “It would be better to nationalize [the banks] than merely nationalize their debt.”
On the evidence, Soros’s view of the banking business is almost as unhinged as Weil’s. U.S. banks report their financial positions according to GAAP and are required to exceed three minimum capital ratios—Tier 1, Total Capital, and Leverage—that were set by regulators after many years of study and deliberation.
I don’t understand how people like George Soros can call for a sweeping nationalization of banks when the banks they want nationalized are operating with capital levels that greatly exceed minimum regulatory standards. Unless, of course, they want to do away with GAAP entirely, or propose criminally prosecuting all the major accounting firms for gross negligence. But I haven’t heard Soros push for either of those.
U.S. banks that do not meet minimum capital standards or otherwise violate regulatory agreements are (rightfully) seized by the FDIC—just as two were last Friday. The discussion about U.S. large bank nationalization is premature, at a minimum. At the very least, people should recognize that there are tremendous differences in the financial strength of the ten largest U.S. banks.
It sure will be an interesting next three weeks, as bank earnings reports are set to be released (There will be quite a variation in results among the big banks, I believe) and word of the results of the government’s stress tests are due. Meanwhile, the negativity surrounding banks in particular seems to be as thick as ever. I wouldn’t be surprised if, in the next little while, some minds start to be changed.
What do you think? Let me know!
Thomas Brown
www.bankstocks.com
