Perhaps I should not be so quick to beat up Wachovia for their gain-on-sale sins; Wells Fargo, like all the other major players in the mortgage market, also runs an originate-to-distribute business model. The mortgages originated directly or through correspondents by the giant mortgage corporations cannot possibly be funded through their own sources of funds, it has to be sold.
When mortgages are sold, either through a securitization or an asset sale of whole loans, a noncash gain-on-sale is recorded. These gains that are recorded at the time of sale depend on numerous assumptions like prepayment rates, default rates, discount rates and so on. You could obviously cheat by using assumptions that are favorable to you as a seller and thus recording a higher gain. But even honest mortgage brokers have to depend on historical data to make these estimates.
The problem is that up until 2007, the housing market had gone through a bull market that had begun in 1992. As real estate prices climbed, no lender need ever lose money so long as they were willing to restructure the loan because the collateral was good enough cover. Now that the housing market has quite literally dislocated, all the assumptions that have been made over the last few years are now suspect.
What this means is that mortgage lenders like Wells Fargo will probably have to start restating the gains that they had previously recorded. Even without the Wachovia acquisition, Wells Fargo would probably have had to go through quite a few years of earnings turbulence as some of these ‘other assets’ (retained interests tends to be parked under other assets) gets marked down to their correct value. From this perspective, the Wachovia acquisition makes a lot of sense because if Wells Fargo is going to take a hit, they might as well use the opportunity to expand the empire and at the same time find a scapegoat for all of their problems.
I find your postings quite laughable. Hey dipstick you acting like this "rapist" hiding in the closet looking for skeletons to dig up frankly makes me think you are sick in the head.
Trying to throw all these questions out, go away stooge. The Fed just slammed your stupid responses to the ground today. This bank will make money. They might have to cycle out the garbage, hoping you are included, but this bank will eventually rule the world.
I am guessing you lost your job. One career move you should opt out of is "conspiracy" theorist. You aren't very good. And you remind me of that "monkey" in the cage wanting everyone to look at you. Get a life or get a gun. If not I will come through this screen and "rip your head off" CHUMP. Or should I say chimp.
Minx, Wells' own pro forma balance sheet for the combined companies as of 9/30/08 shows $28bn in Goodwill and $121bn in Other Assets. Looks like they expect to write down Wachovia's legacy Goodwill entirely ($18bn) but then to add $14bn in new good will for the merger. This plus Wells legacy $14bn generates the $28bn total. Other Assets includes $45bn legacy Wells plus $63bn Wachovia plus $13bn adjustment (the bulk of which reflects an allocated $12.8bn of the purchase price deemed to reflect the value of Wachovia's deposit base). Other Assets for the combined entity as of 9/30 would have totaled $121bn. This is a huge amount. What portion of this do you think is at risk due to potential writedowns of gain-on-sale accounting of mortgages?
Analyzing Wachovia is like trying to count the number of tadpoles in a trash filled swamp, not something that I would recommend. All banks involved in securitization, including Wells Fargo, will have Retained Interests Securitized Assets (RISA). Banks must retain the residual to give comfort to investors in the securitization and also usually keep the super senior tranche because they can earn a risk free spread. The duration of these securitized assets is usually quite short and because of market factors like prepayments on loans and so on, earlier vintages will get bought back and then chopped into a new securitization pool. What this means is that the retained interests held by all banks will have to reflect the changed conditions in the real estate market at some point or other as mortgages tend to form the bulk of securitizations. In Wachovia’s case, Wells Fargo’s management is going to want to make it sooner rather than later. How large the write-off will be is anyone’s guess because Wachovia’s management actually did everything it could to not reveal its own securitization activities. As a commercial bank, certain disclosure rules promulgated by the SEC for broker dealers did not seem to apply to them.
But there is a lot more than just retained interests to worry about. Wachovia was never a preferred capital markets partner and they did all sort of things to earn business. Securitization is usually dependent on setting up Special Purpose Entities (SPE) like Variable Interest Entities (VIE) or Special Investment Vehicles (SIV) to tap the money markets. Even though Wachovia has ‘sold’ many of the bad mortgages from Golden West into the market, they remain on the hook because of the guarantees they gave and other services like standby letters of credit which they had to offer as part of the standard securitization protocol. In setting up these SPEs, Wachovia needed to work with institutional investors, usually hedge funds who will take the thin sliver of equity. Many of these deals are sweetheart deals where Wachovia bears most of the risks while their customers earn a disproportionate share of the gains. Management will usually justify such action by pointing out the other fees which their favored clients throw-off. Wachovia is not alone in doing these ridiculous practices but I believe that it was by far the most promiscuous.
It will take many months of intense work to figure out just how much Wachovia’s assets are really worth and it is nothing that you and I can possibly do. We should just sit back and let Wells Fargo tell us how much they need to write down Wachovia’s assets by and then chuckle a little as they admit to the market that they now need to bring on balance sheet Wachovia’s golems.