Wells Fargo Pick-A-Pay Portfolio: Presented without Comment*

4 Mar

Some of you have may have noticed the ongoing debate regarding the Pick-a-Pay portfolio of Warren Buffett’s beloved Wells Fargo (NYSE: WFC). In order to put this horse to pasture, I present the following with no pejorative words and only a few minor comments.

First, the before (for the entire document you can go here):

Next, the after (full document here):

As promised, the limited commentary:

(1) On the latest conference call, management noted that the PCI portfolio was performing BETTER than expected;

(2) Notice the LTV for ALL PCI loans is higher than originally recorded (based on carrying values);

(3) Notice unpaid principal has dropped from $61.9 billion to $41.9 billion or 32%, yet the carrying value has only dropped 14% to $32.4 billion;

(4) See note (2) from the 2010 Form 10K – “unpaid principal balance includes write-downs taken on loans…”

(5) Finally, from the 2008 Form 10K, the following disclosure was made (emphasis mine):

In accordance with SOP 03-3, loans that were classified as nonperforming loans by Wachovia are no longer classified as nonperforming because, at acquisition, we believe we will fully collect the new carrying value of these loans. It is important to note that judgment is required in reclassifying loans subject to SOP 03-3 to performing status, and is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected, even if the loan is contractually past due.

You the reader can now determine whether or not you consider the loan book better, worse or no different (please vote).

*Ok, minimal comments.

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8 Responses to “Wells Fargo Pick-A-Pay Portfolio: Presented without Comment*”

  1. MS March 4, 2011 at 10:25 am #

    The CFO suddenly quits. A couple of weeks later he is excluded from receiving his end-of-the-year bonus.

    One Wall Street analyst has already reported that the CFO left because he refused to sign off on the financials.

    Hmmm . . .

    Where there is smoke there is fire?

    • Kathleen March 5, 2011 at 12:00 pm #

      Wells is very agressive with accounting. I wonder about the CFO resignation as well. It’s very rare indeed. Something isn’t right with this pick-a-pay portfolio and I wonder if there are other issues buried in the Wells balance sheet?

  2. goodrich4bk March 4, 2011 at 10:26 am #

    Footnote 4 is the “tell”. Carrying value is NOT the amount the borrower owes. Rather, it is the estimated value of the loan, including “accetable yield” and “non-accretable difference”. In plain English, if a pick-a-pay loan has a recast at 8% in a 5% market, the loan is “valued” at a price much higher than the principal balance, even though we know that borrower will walk before paying that 8% coupon.

  3. MH March 4, 2011 at 11:04 am #

    While I fully agree that WFC will feel pain for years on this portfolio and they are substantially under provisioned for losses, I think you are comparing apples and oranges here.

    There were originally ~$120bb in Pay Options which they split in half calling one ‘good’ and one ‘bad’. Then they provisioned the ‘bad’ with ~$23bb of mark downs at acquisition and provisioned the ‘good’ at ZERO. Therefore, they and analysts always say “WFC has a 38% provision for losses on the Pay Option portfolio”.

    But that’s not right. All Pay Options are toxic, both in the good and bad portfolios, thus, the $23bb spread across the full $120bb in only 19% and probably $25bb light.

    Just my 2c.

    • georgetownjack March 4, 2011 at 11:25 am #

      The only thing being compared is the disclosure provided by the company. The first is at the the close of the acquisition (the charges were taken at that time), the second from the most recent filing. If management didn’t want the reader to use this comparison, why didn’t they provide a different chart?

      • MH March 4, 2011 at 3:52 pm #

        what I am saying is that I am not sure that the two tables refer to the same pool of loans. Again, management here has always done a brilliant job with smoke and mirrors and downplaying balance sheet risk.

  4. DANSHANTEAL March 5, 2011 at 4:54 pm #

    SEVERAL THINGS: (1) IT’S TOUGH AS NAILS TO REFINANCE IF YOU HAVE GOOD CREDIT…NOT TO MENTION POOR CREDIT: (2)
    INTEREST RATES ARE AS LOW AS THEY’LL GET; SOON, THEY WILL BE RISING RAPIDLY; (3)HOME VALUES ARE FALLING AND WILL CONTINUE TO FALL; THEN (4) THERE WILL BE A GREAT CRESCENDO LIKE IN BEETHOVEN’S FIFTH; FINALLY (5)THE FOLKS PAYING THEIR BILLS WILL SIMPLY GIVE UP AND WALK AWAY FROM THEIR HOMES. YOU CAN TAKE THAT TO THE BANK.

Trackbacks/Pingbacks

  1. Wells Fargo Pick-A-Pay Portfolio: Presented without Comment* « Finance Blog - March 4, 2011

    […] This story previously appeared at Stone Street Advisors. […]

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