Friday, September 18, 2009

Massive Put Buying - Wells Fargo

Not only do [Wells Fargo’s] outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.

According to sources currently working out these loans at Wells Fargo and confirmed by Dan Alpert of Westwood Capital, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Should the junior tranches eventually default, then the bank is on the hook.

There is much more in the article. Suffice it to say, Wells (WFC) is in much deeper trouble than its executives are letting on.

By the way, Warren Buffett says he knows Wells Fargo’s book better than bank examiners and that the company is doing just fine. We shall see…

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