Wells Fargo Under Increasing Scrutiny Over its Assessment of its Loan Portfolio

Wells Fargo’s (NYSE:WFC) leadership is coming under increased scrutiny as its interpretation of its loan situation in contrast to its shareholders, analysts and outside examiners brought in to go over their books is diametrically opposed, with some thinking the top executives at Wells Fargo could be “delusional.”

The management at Wells Fargo assert that the rate of their deposit growth will bring enough capital in the company to meet the what will be required, and also they are lending out money at a quick pace; consequently they believe their nonperforming loans are always able to be effectively managed.

Rochdale Securities analyst Dick Bove was the one who said he believes the management at Wells Fargo could be delusional, citing specifically the questionable securities and loans, which he described as a potential ticking time bomb.

As for those that performed examinations of the company books, they were evidently astounded at the extraordinary possibility of the problems that could come about from home mortgage and commercial loans, as well as in the credit card sector; all of which seem to be understated by management as to how bad things really are in those loan areas.

There are also concerns about the methodologies being used by Wells Fargo to measure its exposure in its derivatives portfolio, further creating a gap between their view of the overall health of the company and everyone else’s. In other words, there’s another possibility of accounting voodoo being employed to make things look better than they really are in order to keep shareholders from abandoning their positions and driving down the share price even more.

“In sum, management is convinced that it has produced a consistent high return on its businesses benefiting shareholders,” Bove wrote. “Yet the tremors in the volcano keep rising; not subsiding.”
 
This doesn’t even include the tremendous exposure of Wells Fargo to the derivatives portfolio of trades it took on when it acquired Wachovia, which includes its own ticking time bomb. Warren Buffett, whose company Berkshire Hathaway is invested heavily in Wells Fargo, has called derivatives in the past “financial weapons of mass destruction,” and he’s correct, and Wells Fargo via its acquisition of Wachovia is sitting on an even bigger pile of them.

The bottom line in all of this is Wells Fargo may not have close to enough cash on hand to deal with the situation, and may need a lot more before all of this is over.