As we wrote earlier this week, outside experts hired by Wells Fargo to examine its books are reportedly shocked at the bank’s exposure to derivatives trades it took on when it acquired Wachovia, fearing these may trigger huge losses at the bank.
And now Dick Bove is also worried about the bank, seeing a “volcano, with numbers of tremors, that is possibly about to blow.”
Bove says the gap between management views of the company and shareholders may be growing and he outlines a set of reasons that could lead one to believe Wells is either delusional or trying to do its best to postpone the inevitable.
The most troublesome point is the bank’s “questionable” loans and securities, which seem like a ticking time bomb. Bove says that outsiders are convinced that the bank is understating its loan problems in the home equity, commercial real estate, and credit card arenas.
Bove adds that there are significant issues being raised concerning the bank’s valuation techniques in its derivatives portfolio and its accounting in these areas.
There is constant argumentation over the bank’s methodologies in valuing its mortgage servicing portfolio. Additionally, a number of state attorney generals are unhappy with certain of the bank’s mortgage sales practices.
Then, regarding the bank’s balance sheet, he says that Wells may be forced by the imposition of Basel II accounting rules to add hundreds of billions in assets to it, and If so, the company will be forced to sell a sizable amount of equity.
Finally, the Wachovia merger itself is also as source of tremors, he says as he thinks that Wells has not adequately reserved for the multiple problems within legacy Wachovia.
“I am on the side of believing more capital will be needed,” Bove writes.