Below, please find our recent review of Wells Fargo's latest quarter. At the end of the review are pertinent links for both subscribers and non-subscribers to peruse.

Results Review – 1Q10

In 1Q10, WFC slashed the provisions for loan losses, without any significant improvement on the loan losses and NPAs side, to offset the decline in revenues and preventing it to trickle down to the bottom line. The annualized provisioning rate came down to 2.91% in 1Q10 against 3.2% in 4Q09. If WFC maintained the same provisioning rate as 4Q09 in 1Q10, the pre-tax earnings would have been 13.2% lower than the reported pre-tax earnings. WFC would have recorded a q-o-q decline of 12.3% in earnings against the reported q-o-q increase of 1.0%.

We have come across a bank with a very weak equity position, skirting insolvency. It is a German bank trading at an insanely high multiple. Below is a quick synopsis of the solvency situation and the subscriber notes which illustrate the situation and the potential opportunity.

• Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
• Deutsche Bank vs Postbank Review & Summary Analysis - Retail

Anybody who has been following for the last fiscal quarter or so (or has seen my Spanish bank work in 2009) knows that I believe that the EMU as it stood in 2009 would probably be non-existent by the end of 2010. All of the pundits who proclaimed that the European debt crisis was over with the mere declaration that Greece may receive some additional debt either were abjectly lying or truly didn't understand the gravity of the situation. To be honest, there are a lot (and I mean a whole lot) of data points, angles and contingencies to grasp thus it is not necessarily easy. Then again, isn't that what these market professionals get paid for.

Very early in the year, I virtually guaranteed that the Greek banks would fall, or at least have to be rescued (a 2nd time) before they fell. I practically promised it. In the news today...

Lagarde to discuss Greece support with banks: French Finance Minister Christine Lagarde will meet with bank leaders on Wednesday to discuss how its banks could participate in the Greek rescue package. Lagarde told the French parliament the country's banks will reiterate their support for the rescue process on Wednesday but she said tomorrow's meeting could lead to them taking on a more active role, along the lines of what German banks have done. French banks have so far not been asked by the government to participate directly in the Greek rescue package, two sources in France's banking sector said earlier on Tuesday. They have only been asked to maintain their exposure to Greece and have agreed to do this, the sources said. "Nothing beyond this has been requested by the government," one of the sources told Reuters. France has overall the highest exposure to Greek debt, with about $75.2 billion worth of assets in total, according to Bank of International data as at end-2009. Germany's top banks and insurers offered support on Tuesday mainly by keeping open credit lines to banks and by agreeing not to sell Greek bonds for the duration of a wider IMF-led bailout. Germany's Finance Minister Wolfgang Schaeuble said that German financial firms had agreed to buy bonds issued by state controlled bank KfW as a way to help finance the bailout. Deutsche Bank Chief Executive Josef Ackermann said it was important to extinguish the fire in Greece and pledged to help the country. Ackermann is helping to coordinate efforts by the private sector to support the Greek rescue package.

I suggest one references my post, How Greece Killed Its Own Banks!.

The Wall Street Compensation issue is being made much more complex than it needs to be. Let's take Goldman for example. - Bloomberg: Self-Evaluations Seen as New Source of Concern After Goldman Sachs Hearing

April 28 (Bloomberg) -- Wall Street employers, long concerned that their staff’s e-mails may be used against them, now have another thing to worry about: the self-evaluations employees fill out.

At a 10-hour congressional hearing yesterday, senators pointed to Goldman Sachs Group Inc. employees’ self-evaluations, which included boasts about making “extraordinary profits” by betting against the subprime market, as proof the company misled investors into a mortgage-linked investment. [If they made "extraordinary profits", then the transactions shouldn't be considered an economic hedge]

The fact that self-evaluations were used against Goldman employees could keep companies from being open in their own review process, hampering feedback that makes evaluations productive, said Gary Hayes, co-founder of management consulting firm Hayes Brunswick & Partners in New York. [Or they could just be more open with their clients, and wouldn't have to worry about being secretive in their self reviews - duhh!]

“That’s fairly chilling,” Hayes said. “It would make many senior executives very cautious, if not guarded in what they say in evaluations. You’ll hinder the kind of dialogue that’s necessary.” Such evaluations are “a standard part of corporate America,” he said. [Again, why doesn't this guy say "It would make many senior executives very cautious, if not guarded in how they treat their clients"!!!!????? It's as if it is expected that GS will screw their clients, and the hurdle is how to conduct a review without getting busted for it!]

Senators used e-mails and self-evaluations produced by Goldman, which is being sued by the U.S. Securities and Exchange Commission, to attack the firm. Goldman denies the charges.

I have updated the latest Ireland research (released yesterday) and urge all to review the additions, as well as our overview of Ireland's fiscal difficulties:

• Irish Bank Strategy Note
• Ireland public finances projections_040710

We fear Ireland is on the verge of considering a massive Ponzi Scheme, if which avoided, will possibly result in a fiscal deficit approaching 20%, dwarfing the beleaguered Greece by several leagues.

Non-subscribers should reference Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?, for the underlying premise of this in depth article described the upcoming situations with prescience.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

The Pan-European Sovereign Debt Dominoes start to fall "precisely" as anticipated...

From the Wall Street Journal:

Standard & Poor’s downgraded Spain’s long-term credit-rating to double-A with a negative outlook just one day after roiling global markets with downgrades for both Greece and Portugal.

“We now believe that the Spanish economy’s shift away from credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed,” S&P credit analyst Marko Mrsnik said.

The move sent the euro to a fresh one-year low against the dollar of $1.3129; the 16-nation currency had briefly bounced higher as fears about Greek debt contagion eased. Spain’s IBEX index extended earlier losses, oil prices fell and U.S. stocks briefly turned negative.

This follows a downgrade of Portgual and Greece (to one of junk). The Actionable Intelligence Note of last week was quite timely. Up until a few days ago the options on many of these banks were quite cheap, on relative basis (even the Greek banks, at least on a relative basis though IV was high). Notice the explosion in both implied volatility and intrinsic value leading to a 100% to 200% gain...

Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.

Reference (Bloomberg) Stocks Plunge as Dollar, Treasuries Gain After Greece, Portugal Rate Cuts and (the Wall Street Journal) S&P Downgrades Greece to Junk Status:

“S&P cut Greece's ratings to junk status, saying the country's policy options are narrowing as it tries to cut its large budget deficit. The news, combined with an S&P downgrade of Portugal, pushed down the euro to $1.3269, hit U.S. stocks and sent Treasury prices higher”.

• •Stocks Plunge, Asia Bond Risk Climbs on Greece, Portugal Default Concerns
• •Greece's Junk Contagion Pressures EU to Broaden Bailout After Market Rout
• •Trichet Travels to Berlin on Diplomatic Mission as Merkel Nears Greek Vote
• •Greece Bondholders May Lose $265 Billion in Default as S&P Sees 70% Loss
  April 28 (Bloomberg) -- Holders of Greek bonds may lose as much as 200 billion euros ($265 billion) should the government default, according to Standard & Poor’s.

  The ratings firm cut Greece three steps yesterday to BB+, or below investment grade, and said bondholders may recover only 30 percent and 50 percent for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about 296 billion euros of bonds outstanding, data compiled by Bloomberg show.

  The downgrade to junk status led investors to dump Greece’s bonds, driving yields on two-year notes to as high as 19 percent from 4.6 percent a month ago as concern deepened the nation may delay or reduce debt payments. Prime Minister George Papandreou is grappling with a budget deficit of almost 14 percent of gross domestic product.

  “It’s now not just market sentiment, but a top rating agency sees Greek paper as junk,” said Padhraic Garvey, head of investment-grade strategy at ING Groep NV in Amsterdam.

  Before yesterday, Greece’s bonds had lost about 17 percent this year, according to Bloomberg/EFFAS indexes. The 4.3 percent security due March 2012 fell 6.54, or 65.4 euros per 1,000-euro face amount, to 78.32.

  ...

  S&P indicated the cuts, which may force investors who are prevented from owning anything but investment-grade rated bonds to sell, may not be over, assigning Greece a “negative” outlook.

  “The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory,” S&P credit analyst Marko Mrsnik said in a statement.

  Credit-Default Swaps

  Traders of derivatives are betting on a greater chance that Greece fails to meet its debt payments.

  Credit-default swaps on Greek government bonds climbed 111 basis points to 821 basis points yesterday, according to CMA DataVision. Only contracts tied to Venezuela and Argentina debt trade at higher levels, according to Bloomberg data. Venezuela is at about 846 basis points and Argentina is at about 844, Bloomberg data show.

  Just minutes before lowering Greece’s ratings, S&P cut Portugal to A- from A+. Yields on Portugal’s two-year note yields jumped 112 basis points to 5.31 percent, while credit- default swaps on the nation’s debt rose 54 basis points to 365.     The downgrades may force banks to boost the amount of capital they are required to hold against bets on sovereign debt, said Brian Yelvington, head of fixed-income strategy at broker-dealer Knight Libertas LLC in Greenwich, Connecticut.

  While bank capital rules give a risk weighting of zero percent for government debt rated AA- or higher, it jumps to 50 percent for debt graded BBB+ to BBB- on the S&P scale and 100 percent for BB+ to B-.

  “These downgrades are going to cause people to increase their risk weightings,” Yelvington said.

Well, the answer is.... Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)...