The Games Banks Play

The economic bloggers of the world are digging into Wells Fargo's books, and they are finding a very foul odor.

#1) Market-ticker posted this little item, with the supporting document, that should make for interesting reading.

This borrower couldn't pay and thus stopped doing so. This should generate a "NOD" (Notice of Default) and ultimately lead to foreclosure, right? It should result in an impaired asset which might be sold to some other company (at a discount), right?
It got sold all right - right at the "120 day" late point where Wells counts a loan as "defaulted."
But look at who it got sold to.....
Yes, Wells bought the loan from.... itself?

It's a classic shell game. Wells Fargo can avoid generating a NOD and go to foreclosure and thus book losses, but the losses are still real.

#2) The Bank Implode-O-Meter investigations of Wells Fargo turned up this interesting factoid.

In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.
Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.
According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large.
Keep in mind, should the junior tranches eventually default, then the bank is on the hook.

Wachovia had $230 Billion in commercial loans when they were taken over by Wells Fargo. That portfolio is now defaulting at a rate 8 times greater than industry average.

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Great story

Where are we with the FASB these days? They are lassoed, silenced and now we have a hidden toxic brew which is bubbling through the surface through dedicated bloggers and leaks?

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Possible new structure used by Barclays.

Financial Times is reporting that Barclays is selling $12 billion of toxic assets to some Cayman based company called Protium Finance (a partnership of unknown investors).

Barclay sold $12 bil. in toxic assets to this company and issued a $12 bil. loan to the company for the purchase. Great way to smooth out earnings by possibly avoiding a huge hit in the de-valuing of these assets.

Gillian Tett has a very good explanation of the impact of the deal:

But in another sense, there is an uneasy echo of the past. Most notably, by selling those $12.3bn assets to Protium, what Barclays is essentially doing is taking a pile of toxic items out of its front room (ie the balance sheet) and stuffing it into an entity that is not inside the house (the garage, or cellar).

After all, the fine print of the Barclays announcement makes it clear that while the British bank is going to count the Protium assets as being “on balance sheet” for regulatory purposes, it is removing the assets from the balance sheet in accounting terms, since Protium is legally “independent”, based in the Cayman Islands.

I am sure other financial conglomerates are watching how this works out for Barclays. - Financial Information for the Rest of Us.

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Rebel, read this

May the Cayman Islands be so overloaded with rats it sinks.

That's why I wrote it, using the Caymans to get out of whatever your government is doing is a long standing "tradition".

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Good find

I've been saying right from the start that the banks are playing games with accounting to hide massive losses. Now it appears they are going to extreme levels.
This has the Japan scenario written all over it.

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Remembrance of Lehmans Past

Sounds almost exactly like what Lehman Bros. did right before their fall, except they used their own office space, and some traders resigned, then went to the set aside Lehman office space and set up a new hedge fund with their toxic stuff in it.

Didn't seem to work too well for them, although this Barclays setup should make their valuation appear better to the market investors.

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