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Article by DailyStocks_admin    (04-09-08 02:55 AM)

Welcome to the DailyStocks Discussion Forum on Wells Fargo, a key holding of Berkshire Hathaway. This forum is only for serious value investors who want to share work on Buffett's stocks. We plan to close this forum to new investors after we reach 300 investors. If you have not signed up, please sign up soon.

On Feb. 19, 2009 Wells Fargo hit a new 10 year low. As of December 31, 2008, Berkshire Hathaway owns 289,259,868 shares.

Warren Buffett has owned Wells Fargo Corporation (WFC) for decades. Robert Hagstrom's book, The Warren Buffett Way, Second Edition , devotes several pages on Wells Fargo well worth reading. In his annual letters, Buffett often mentioned that the management of Wells Fargo is the key reason for his investment. This is what Buffett wrote in his 1990 letter:

The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another - Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt. (Thomas J. Watson Sr. of IBM followed the same rule: "I'm no genius," he said. "I'm smart in spots - but I stay around those spots.")

Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.

Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity and 1.25% on assets. Our purchase of one-tenth of the bank may be thought of as roughly equivalent to our buying 100% of a $5 billion bank with identical financial characteristics. But were we to make such a purchase, we would have to pay about twice the $290 million we paid for Wells Fargo. Moreover, that $5 billion bank, commanding a premium price, would present us with another problem: We would not be able to find a Carl Reichardt to run it. In recent years, Wells Fargo executives have been more avidly recruited than any others in the banking business; no one, however, has been able to hire the dean.

Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.

None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.

A year like that - which we consider only a low-level possibility, not a likelihood - would not distress us. In fact, at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity. Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices.

History rhymes. The big question is whether Wells Fargo at these prices of 15 dollars and change is a bargain like in 1990 or is it on its way to going to zero because this economy is just going to be a whole lot worse than 1990.

Any thoughts? Post your comments. You must be logged in to post.

The tiny url for this board is:

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Username Comments
graham 
newbie
Posts: 31

Reg: 02-16-09

02-16-09 07:36 PM - Post#2009    
    In response to Stock_Man

Wells Fargo says that in the 4th qtr of 2008, they saw a huge increase in mortgage applications beyond the bank's capacity. Wells Fargo should come out of this crisis with a much bigger franchise and even bigger barrier to entry. Wells' secret is being able to sell 5 products to the average customer -- the highest in the bank industry.

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netnet 
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Posts: 0

Reg: 02-22-09

02-16-09 07:51 PM - Post#2011    
    In response to graham

WFC's tangible book equity ratio is mighty thin and does not serve a margin of safety, IMO.

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Edited by dailystock on 02-17-09 12:46 AM. Reason for edit: No reason given.

 
graham 
newbie
Posts: 31

Reg: 02-16-09

02-16-09 08:00 PM - Post#2013    
    In response to netnet

I think Wells does have a franchise value and thus the earnings power is more important than tangible book value. It is going to be a matter of how much Wells can earn from its depositors over an economic cycle.

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munger 
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Posts: 35

Loc: Santa Barbara, CA
Reg: 02-16-09

02-16-09 11:53 PM - Post#2021    
    In response to graham

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munger 
newbie
Posts: 35

Loc: Santa Barbara, CA
Reg: 02-16-09

02-16-09 11:56 PM - Post#2022    
    In response to munger

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 01:29 AM - Post#2024    
    In response to munger

In this week's Barron's, the guy from Sandler O'neill said that he thinks there is at least 1 trillion of bank losses. Goldman Sachs said it is closer to 2 million. The TARP has only issued 350 Billion. The stimulus is another 800 Billion but it won't come until 18 months or so. There is still a big hole to be plugged. It's too early to be buying WFC at this point.

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 01:35 AM - Post#2025    
    In response to munger

So far, Buffett's been wrong since disclosing he bought more wells in September 2008

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value 
newbie
Posts: 6

Reg: 02-22-09

02-17-09 07:14 AM - Post#2026    
    In response to netnet

The part that most troubles me is the remnants of Golden West (World Savings) that WFC acquired with Wachovia. What is the worst possible scenario for their pick-a-pay loans? Let's say they had to write off $50 billion or $60 billion. Could WFC handle that?

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graham 
newbie
Posts: 31

Reg: 02-16-09

02-17-09 07:21 AM - Post#2027    
    In response to value

The key thing to watch for is unemployment. They are assuming 9-10% unemployment rates for their assumptions. If unemployment goes higher than 10%, more equity will need to be raised. I am betting on the fact that gov't will not let Wells go. And Wells is the strongest of the remaining big banks.

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 07:27 AM - Post#2028    
    In response to graham

There is so much uncertainty I am staying out. However, Barron's wrote positively about the preferreds on these banks more than once. I think the preferreds are worth a look. 8-10% yields on Bank of America, Wells Fargo.

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graham 
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Posts: 31

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02-17-09 07:36 AM - Post#2029    
    In response to netnet

In December presentation to Goldman, Wells Fargo CEO sees U.S. housing market may be bottoming

By Jonathan Stempel

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) Chief Executive John Stumpf said on Wednesday the U.S. housing market may be bottoming, a development that could ease his bank's pending acquisition of Wachovia Corp WB.N.

Stumpf's comments, at the Goldman Sachs U.S. Financial Services Conference, reflected his optimism that Wells Fargo will continue to avoid the credit problems that have caused hundreds of billions of dollars of writedowns industrywide since the credit crisis began last year.

Yet shares of Wells Fargo fell after analyst Richard Staite at Atlantic Equities downgraded the bank to "neutral" from "overweight," saying rising losses from home equity and commercial loans could force Wells Fargo to cut its dividend or raise $10 billion of dilutive capital. In afternoon trading, the shares were down $1.67, or 5.5 percent, at $28.83.

Stumpf said rising unemployment is the biggest threat to housing. But even in California "more stuff is selling," he said, and multiple bidders have begun to make offers on foreclosed properties. Wells Fargo is based in San Francisco and is the nation's second-largest U.S. mortgage lender.

"We're not at the end," Stumpf said. "My suspicion is there is some more to go. But we're starting to see some early signs that maybe we've reached the bottom in housing or close to it."

Wells Fargo agreed on October 3 to buy Charlotte, North Carolina-based Wachovia after the latter was felled by soaring losses on "option" adjustable-rate mortgages it took on when it bought California lender Golden West Financial Corp in 2006.

The all-stock transaction, valued Tuesday at $13.1 billion, is expected to close by year-end. Wachovia shareholders will vote on the takeover on December 23. Wells Fargo would become the fourth-largest U.S. bank, with $1.4 trillion of assets and $774 billion of deposits, and more than 6,600 banking offices.

Wells Fargo has said it expects to write down $71.4 billion of Wachovia loans, including $36 billion of option ARMs and $9.6 billion of commercial real estate.

Stumpf expects at least $5 billion of annual cost savings, and expects the takeover to boost earnings per share by 20 percent or more in 2011, and by higher amounts thereafter.

"I can't tell you how much I like this deal, despite the fact things are getting worse. But we expected that," he said, referring to economic conditions.

He said Wells Fargo does not make and still does not like option ARMs, and will run off Wachovia's portfolio.

Stumpf also said Wells Fargo remains a beneficiary of a "flight to quality" among deposits seeking stable banks.

The situation has become easier following the disappearance in the last six months of troubled lenders with large California operations that chased deposits with big yields.

Countrywide Financial Corp was bought by Bank of America Corp (BAC.N), while Washington Mutual Inc (WAMUQ.PK) IndyMac Bancorp Inc (IDMCQ.PK) and Downey Financial Corp (DWNFQ.PK) failed. Washington Mutual's operations were bought by JPMorgan Chase & Co (JPM.N), and Downey's by U.S. Bancorp (USB.N).

"There is no WaMu, there is no IndyMac, there is no Countrywide, there is no Downey. Who is paying the crazy rates?" Stumpf said. "That's hopeful to us." Continued...
http://www.reuters.com/article/gc03/idUSTRE4 B93QI2...


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graham 
newbie
Posts: 31

Reg: 02-16-09

02-17-09 07:39 AM - Post#2030    
    In response to graham

Many of the mortgage securities held by banks are marked-to-market at prices that make no sense. 20-30 cents on the dollar for mortgages that are still paying. The Barrons interview this week talks about this as well.

If marked-to-market gets suspended, or the government's plan to halt foreclosure, many of these financials will rally big time, IMHO.

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 07:44 AM - Post#2031    
    In response to graham

Could this become a material weakness?

Wells Fargo & Company (NYSE: WFC) said today that – as a result of credit events after its January 28, 2009 announcement of year-end 2008 results and before filing its 2008 Annual Report on Form 10-K – it will record other-than-temporary impairment and take a non-cash charge to earnings of $328.4 million (pre-tax) in fourth quarter 2008 for investments in certain perpetual preferred securities.

Because these securities were carried at fair value at December 31, 2008, the loss on these securities was previously reported as unrealized losses on securities available for sale within cumulative other comprehensive income, a component of total stockholders’ equity on the Company’s balance sheet. The Company expects this charge will reduce full-year 2008 net income to $2,655 million, or $0.70 per common share, from $2,842 million, or $0.75 per share, as previously reported. For fourth quarter 2008, the Company expects the charge to increase its previously reported net loss to $(2,734) million, or $(0.84) per share, from $(2,547) million, or $(0.79) per share. The Company expects to file its 2008 Annual Report on Form 10-K on February 27, 2009.

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets, providing banking, insurance, investments, mortgage and consumer finance through more than 11,000 stores, over 12,000 ATMs and the internet (wellsfargo.com) across North America and internationally. Wells Fargo Bank, N.A. has the highest credit rating currently given to U.S. banks by Moody’s Investors Service, “Aa1,” and Standard & Poor’s Ratings Services, “AA+.”

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graham 
newbie
Posts: 31

Reg: 02-16-09

02-17-09 08:44 AM - Post#2032    
    In response to netnet

So, I bought a bank. I know...I know. I said I wouldn't. Then again, that was a year or two ago, when I couldn't understand what the hell these guys were doing to make money. CDOs. Sub-prime mortgages. I would try to read the annual reports, and they would make my head spin.

Fortunately, the days of "creative" investing is over...for now. I have full faith that Wall Street will ensnare the markets in another mess in the next ten or twenty years. Still, banks will eventually return to "normal" for at least a while. (That is, of course, once they get through this "panic" mode.)

In a "normal" environment, banks aren't all that difficult to understand. The lend money; the sell investments and financial products; they make money on interest rate spreads. With blood pouring through the streets in the banking sector, much of it for good reason, we'll look at Wells Fargo and Wachovia, separate and together.

Grab a cup of coffee. This is a long one, broken down into two parts, each one being ridiculously long. Then again, we're expanding our sphere which ain't light reading. Wells Fargo, from 1994 through 2008

An analysis of Wells Fargo starts in 1994 — the earliest date we can get annual reports from the SEC's IDEA Database (formerly EDGAR). I'll spare you the historical details prior to 1999. Needless to say, Wells Fargo was a very strong bank. Its merger with Norwest in the late 1990s turned the company into a giant.

Of course, the merger wasn't without growing pains. In the first few years after the merger, Wells Fargo would take $500 to $800 million hits to earnings based on non-cash amortization charges, as well as non-recurring (or short-lived) restructuring charges and integration charges (like software purchases to bring the two entities onto one computer system, advertising to keep customers well-informed during the transition, etc.)

From 1999 through 2002, Wells Fargo would report aggregate net income of roughly $16.8 billion. Its actual cash earnings were closer to $20.1 billion during that time, generating nearly 20% cash returns on equity.

From 1999 through 2007, cash earnings grew from $4.9 billion to roughly $9.4 billion a year. In addition, Wells Fargo periodically repurchased shares, increasing the intrinsic value per share as the company grew.

We'll get into the actual valuation after we explore the businesses at length. For now, as you can see on the chart below, let's just say that Mr. Market did a pretty decent job of valuing Wells Fargo for most of 2000 through 2007. For the moment, ignore the 2008 section of the graph. We'll look at that as we pick apart today's valuation of the combined Wells Fargo/Wachovia entity.

Wachovia, from 1999 through 2007

Wachovia's earnings were much more sporadic than those of Wells Fargo in the early 2000s. Like Wells Fargo, however, Wachovia had a ton of non-cash charges and non-recurring charges that should be accounted for in calculating intrinsic value. Remember: It's the accountant's job to record the business; it's our job to evaluate it. In that light, we need to figure out what Wachovia would have earned had it not taken those special charges.

Don't get me wrong: Those charges are real. Still, because they were non-recurring or short-lived, and because we're looking into the future, we need to figure out what Wachovia would look like after it's done taking those charges.

Once again, Mr. Market did a good job of pricing a business. Wachovia generally traded right around its intrinsic value, with very little margin of safety, from 1999 through 2007. (Keep in mind that I calculate intrinsic value for each year as though I were an investor evaluating the business at that time, and not backwards looking with today's information.)

Full article on: http://www.fwallstreet.com/blog/175.htm

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Edited by dailystock on 02-17-09 02:19 PM. Reason for edit: No reason given.

 
graham 
newbie
Posts: 31

Reg: 02-16-09

02-17-09 10:35 AM - Post#2046    
    In response to value

The part that most troubles me is the remnants of Golden West (World Savings) that WFC acquired with Wachovia. What is the worst possible scenario for their pick-a-pay loans? Let's say they had to write off $50 billion or $60 billion. Could WFC handle that?

WFC wrote down $25 Billon of the Golden West/Wachovia $122B of pick-a-pay mortgages by $25B before consolidating Wachovia's balance sheet. WFC is assuming a further $10-$11B of eventual losses that will run through the income statement over time (peaking in 2010).

So WFC's assumptions is 30% loss rates on this book.

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value 
newbie
Posts: 6

Reg: 02-22-09

02-17-09 10:41 AM - Post#2047    
    In response to graham

This anecdote is troubling.

http://www.planetfeedback.com/wells+fargo/overall+...

I have a checking account ending in xxxx and a savings account with direct deposit. Recently I have noticed a trend towards extreme rudeness by Wells Fargo staff in person and on the phone. Customer service at my previous bank of 15 years, on th east coast, Citibank, was never this poor. I had switched to WF on the raves of several friends, and the strong security of its online ratings.

Recently I ordered checks by telephone and made several large withdrawals in cash, I assumed that the cost of checks were debited immediately--apparently they were not as I found out later. Wells Fargo owes me nearly $730 in outstanding fraudulent debits on my atm card that I filed a police report on that so far it has not honored my claim (which is illegal by federal law if reported promptly, which it was--it has been a month and I still have not gotten my money, what a miserable bank!) Anyway due to the withdrawals and the fraud, I was short for the cash required to pay for the checks, so Wells Fargo charged me $35 for an overdraft fee.

I called WF customer service and asked for a fee reversal for these reasons. 1) when I purchased the checks, I was never told when the cost of checks would be debited and how much I would be debited for it, two important points that were relavent. 2) if I had been the victim of fraud, there would have been enough cash anyway to cover costs 3) if WF had given me provisoonal credit for aforementioned as per their own policy, my costs would have been covered 4) I had never asked for a courtesy credit not related tof fraud before.

The agent scoffed and said tough luck. I asked for a supervisor, and a very rude Mr. Bonnie said that unless a "system error or a bank error was responsible, they would NEVER issue a refund." These are the people our taxpayer money just issued bailout money for?

In addition WF had two of or three of the rudest people I have ever met...Daniel Acosta in ATM fraud claims, Crystal working under him, and Liz Brown in that department's executive office who can't seem to return a phone call.. John G Strumpf, their CEO should fire them all, especially if he wants uncle sam to help private banking to remain solvent.

This bank is a loser.

Treat customers better, be more humble, refund my $35 overdraft fee and pay my my $700 plus claim as per their policies and federal and state laws and reprimand or fire aforementioned employees.

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graham 
newbie
Posts: 31

Reg: 02-16-09

02-17-09 10:52 AM - Post#2048    
    In response to graham

This presentation by Wachovia is helpful.

http://www.wachovia.com/file/WB2Q08_Presentat ion.p...

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 11:09 AM - Post#2049    
    In response to graham

The reason Tim Geithner's plan had no details.

By Neil Irwin and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, February 17, 2009; Page D01

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.

The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis. Full article

http://www.washingtonpost.com/wp-dyn/content/artic...

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netnet 
newbie
Posts: 0

Reg: 02-22-09

02-17-09 11:48 AM - Post#2051    
    In response to netnet

February 13, 2009

Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery.

http://www.pbs.org/moyers/journal/021320 09/watch.h...

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