Wednesday, February 27, 2013

Wells Fargo cuts estimate of legal losses

At a time when lawsuits and settlements are a regular occurrence in the financial industry, investors have grappled with how to get a handle on how much the country's biggest banks could still lose.

Wells Fargo took its latest shot at estimating how much it could lose above what it's set aside money for, in its annual report filed today: $1 billion.

That's a little less than the $1.2 billion the San Francisco bank estimated last year and in 2011. The bank calculates it by estimating a range of possible loss for its outstanding litigation, and setting aside money for what it believes is the most likely scenario. The $1 billion marks the high-end of the range.

This is in addition to the $2.4 billion the bank estimated it could possibly lose on bad mortgages that securitizers could try to force Wells Fargo to repurchase.

Of course, the estimate only accounts for currently pending litigation. At the bank's last quarterly earnings call, in January, an analyst asked whether CEO John Stumpf believed that more lawsuits would be coming.

"I can’t predict what’s all going to come up," he said. "But I’ll tell you, I'm pleased that we’re this far through.”

In its last annual report, covering 2011, Bank of America put its estimate at maximum possible loss at $3.6 billion. The bank's new annual report is expected any day now.

Other notes from my quick look at the annual report:

Acquisitions speed up. Wells Fargo reported acquiring $4.8 billion worth of assets from other companies in the year, its busiest year in business combinations since it bought Wachovia in 2008. The largest acquisition, at $3.6 billion in assets, was the energy lending business of France's BNP Paribas, announced in February. The 2012 activity was more than eight times what it did the year before, when the bank bought $588 million in assets.

Taxes. Wells reported paying $9.1 billion in current and deferred income taxes over the year, adding up to a 32.5 percent effective tax rate. That's up from $7.4 billion and 31.9 percent after a string of four quarters of record earnings.

Salaries up, occupancy down. The bank's salary and commission costs increased again, hitting $24.2 billion in 2012, up 4 percent. But at the same time, Wells' office cost came down. The bank paid $2.9 billion in occupancy costs, down 5 percent from the year before.


David said...

Only a billion??? Bonuses for all!

Anonymous said...

According to Bloomberg if it wasn't for taxpayer subsidies of $83 billion a year in the form of lower borrowing costs big banks like Wells Fargo would only just be breaking even. If you add in all the bad loans well they are just insolvent.

Anonymous said...

@anon 11:15:

Which means without the artificially low borrowing rate, they'd be charging more money for their services. While I am indeed fully aware that it's few and not all, but if you really think about it, the taxpayers that are indirectly financing these low rates are the same group of people whose failure to repay debt obligations is the reason for the need.

Philosophically, the idea of social democracy is that the group as a whole has a social contract to care for those that are in need. The burden is spread across the population, not left singularly on the shoulders of the depressed. Under that belief, everyone shares the spoils of success just as they share the repercussions of the failures.

A small portion of people can't/don't pay back their debts, so we collectively have to do it for them. That's how our system works. That's how we wanted it, that's how we like it, so it's our responsibility.

Disclaimer: I'm not speaking to immoral practices and specific issues within large residential lenders in years past, only to the specifics of your post. Default rates went up and interest rates still went down. That's the opposite of how it works. How was that possible? Because what should have been financed through higher interest rates was financed through taxpayer burden. Pay it here, pay it there, doesn't matter; in the end we're all still going to pay for it.