Wednesday, 06 May 2009 00:00

The Great Bank Bubble of 2009 (and 2008, and 2007, 2006, 2005, 2005, 2004, 2003)! Featured

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As I anticipated, Wells Fargo fails the stress test under all the three active scenarios (base case, optimistic and pessimistic scenarios) by a significant degree and will have to raise capital in order to achieve a Tangible Common Equity (TCE) ratio of 4.0%. The bank's TCE ratio stands at 3.06% which is significantly lower than the prescribed limit of 4.0%. Further, based on our projections, the bank's TCE will likely fall to 2.37% at the end of 2010 after adjusting for losses (both accounting as well as economic losses on account of its significant off-balance sheet exposure towards the QSPE's and SIV's) worth US$64 billion. In the base case scenario, to bring the TCE up to 4%, the bank would require to raise US$23.5 billion. Furthermore, in the pessimistic and optimistic cases, the bank must raise US$23.9 billion and US$22.8 billion respectively. 

Additionally, the bank's Tier 1 Capital stood at 8.28% as of March 31, 2009, which is marginally above the prescribed limit of 8%. However, due to significant off-balance sheet exposure of US$1.8 trillion as of December 31, 2008 and the risk associated with it, the bank Tier 1 capital will likely fall to 7.59% at the end of 2010 and WFC will have to raise significant capital to sustain the loan and lease losses and losses pertaining to off-balance exposure. According to our estimates, in the base case scenario, the bank would have to raise US$5.08 billion. In the pessimistic and optimistic cases, the bank would need to raise US$5.6 billion and US$4.3 billion respectively. Moreover, the deeper recessionary threat necessitates the bank to maintain higher capital. Depending on the asset quality of Wells, we have pegged the Tier 1 Capital to 9% instead of prescribed 8%. As per this measure, the bank would require to raise US$17.6 billion in the base case scenario.  WFC is actually up $1.74 as I type this, 10:41 am EST.

Note: Since leaks are starting to come out, I'll release my findings for the rest. Goldman and American Express can, according to my calculations, clear the 4% TCE hurdle without raising extra capital. I will not have the time to run JP Morgan, but I would not be shocked if it was found that they wouldn't be found to need more.

I will attempt to release more metrics to the free blog, as well as extensice calcs to pro subscribers and a summary to retail subscribers. As I have stated in the comments section, I believe we are in a bank bubble. Asset quality and credit metrics are still trending down sharply, while share prices are doubling and tripling. The bank that was the feature of intelligence note a month or two ago has practically doubled, and has reported blowout earnings - that is until you bother to read how they achieve those earnigns. They hid behind accounting shenanigans to conceal the fact that they are drastically under provisioning (they literally have a negative provision cushion) and commercial real estate and construction credit metrics are spiraling downward at a rapid clip. I will reveal more on this via a subscriber updated later on today or tonight.


I will also release findings on American Express and Goldman as well. This will be the end of the free preview of our analytics, and I would like to remind all that since I am not privvy to the same set of info that the government is, there may be some variance in terms of results.

Read 9109 times Last modified on Thursday, 07 May 2009 08:05
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.