Journalism in the Public Interest

Tackling Reams of Bank Data Can Take Diligence, and Trust

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Some people stay sharp in their old age by doing crossword puzzles. Some play memory games or Scrabble or cut back on the heavy drinking.

That’s minor league stuff. If you really want to give your brain a workout to stave off the ravages of mental decline, I recommend trying to read bank financial statements.

In my last column, I wrote about how many bad residential mortgage loans the big banks had on their balance sheets, using numbers from a site called, which does the punishing work of wading through regulatory filings, known as call reports, and aggregating the data.

Take Wells Fargo. About $41.3 billion, or 19.5 percent, of its $212 billion worth of residential first-mortgage customers were either late in paying or had been classified as “nonperforming,” according to the site.

This was in line with calculations by the Office of the Comptroller of the Currency, which estimates that about a fifth of residential loans on bank balance sheets nationwide are delinquent or in the process of being written off.

Turn to Wells Fargo’s filings with the Securities and Exchange Commission for a full picture, according to Wells. It’s a happier, alternate universe in which $15.6 billion, or 7 percent of $223 billion, of first-mortgage loans are tagged late or “nonaccrual,” a charmingly opaque euphemism for bust.

Two helpful representatives from Wells Fargo gave me a raft of reasons to disregard the call reports and trust the SEC filings. Their main argument is that the federal figure includes a bucket of loans Wells wrote down when it bought Wachovia in 2008.

When Wells Fargo bought Wachovia, it set aside a huge reserve for those loans—mostly pick-a-pay deals, where the borrower could choose to make a minimum payment, with the downside that the rest of the monthly amount owed was tacked onto the outstanding balance. The loans aren’t performing well, but they are doing better than Wells expected back then, which makes investors even more confident that the bank will eventually kick some of that reserve back to the bottom line.

In addition, the representative pointed out, the call figure was an analysis that added up different figures from several bank divisions. But Wells has some divisions that don’t file call reports but nevertheless make a modest number of mortgage loans. (All big banks are holding companies with multiple subsidiaries.)

(Disclosure: The pick-a-pay loans were made by Golden West Financial, which was sold to Wachovia in 2006 by Herb and Marion Sandler, the principal financial backers of ProPublica.)

To be fair, banks do file mountain ranges of disclosure documents. They report to the SEC (which protects investors), the Federal Deposit Insurance Corporation (which insures borrowers), the OCC (which regulates banks) and the Federal Reserve (which also regulates banks with slightly different responsibilities).

Day after day, they push out news releases that run to dozens of pages. They prepare reams of special presentations for investors, the most recent of which from Wells ran to 51 pages, on top of a 41-page news release. The SEC filing from the quarter was 162 pages.

The numbers and presentation differ slightly in all of them and often differ from other banks’ presentations, stirring a struggle among outsiders to compare apples and bananas. No professional admits this publicly, but many investors and analysts privately acknowledge that they can’t fully track the data gushing each quarter from the nation’s banks.

Even if they could somehow reconcile all the numbers, analysts would still be significantly in the dark. In many instances, banks’ financial disclosures are drawn from estimates that only management teams are privy to. Even the simplest of concepts—how much capital a bank has—is a number based on countless calculations that, let’s face it, are not much better than guesswork.

So, it is all the more important that we trust bank management and regulators to make sure the numbers we see truly reflect their financial condition.

Wells is one of the four biggest banks in America. After the financial crisis, it vaulted into this top echelon of gigantic institutions, along with JPMorgan Chase, Bank of America and Citigroup. In this group, Wells has the greatest exposure to residential real estate, more recently infamous as the single-worst asset class in America.

For many reasons, some not particularly rational, Wells seems to be scrutinized less by investors and the media. One is that Warren E. Buffett holds a large stake in the bank, the financial equivalent of a Good Housekeeping seal of approval. Wells is based in San Francisco, far from the madding crowd of American finance and media.

Wells, for its part, has historically displayed disdain for investors and Wall Street, in some regards an appealing attribute. While some of its competitors have tried to wheedle their way into analysts’ hearts, the San Francisco bank refused to engage on even the most basic level. Not until last year did its management deign to take questions on conference calls after earnings reports.

A Wells Fargo representative told me that the bank’s disclosure was “best in class” and listed the enormous amount that it provides.

The bank still falls short of other big banks in disclosure, according to investors and analysts I’ve spoken with. It doesn’t break out the reserves it has made by asset class, unlike Bank of America, making it particularly difficult to understand how much it is reserving for bad residential real estate loans. It doesn’t separate its business lines in the detail that the other banks do.

Then there are its nonperforming loans. For its residential mortgages, it doesn’t classify them as nonaccrual until they are 120 days past due, instead of the more typical 90 days. The effect is to make the numbers look better.

The crucial figure, over time, is the loss rate, the bank representative said. And since the Wells portfolio—not counting the bad Wachovia loans—has been performing consistently well for many years now, investors should believe that the bank is doing something right, and better than its competitors with its mortgage portfolio.

Yet housing prices continue to fall, the economy is weaker than expected, and we are flirting with another financial crisis, as Europe gets its revenge on us for having exported our calamity to their continent in 2008. Wells isn’t likely to remain immune to that. “Trust but verify,” Ronald Reagan used to say of the Soviet Union. Not a bad idea.

Errr…Is anybody surprised that banks—organizations that had the idea of self-referential credit, loans, and insurance, then aggregating and distributing those “instruments” throughout a wide body of investors—issue too much information to track what they’re doing?

There are three ways to hide your interests.  First, you can do all your work through agents who can’t be traced back to you, like using someone else’s computer to surf the web.  Second, you can work very hard at being quiet and covering your tracks like a James Bond movie.  Lastly, you can cover your activity by flooding observers with conflicting data, like subscribing to every magazine in the world so that nobody knows you’re actually reading “Tiger Beat.”

You’re falling for the last one.  While you (or any investigator) tries to reconcile the SEC with the Fed with the press releases, the bank is free to do whatever it likes, because the truth is buried deep in the manure heap.  The magician has the audience’s attention fixed up here, distracting them from the real mechanics of the trick down there.

And the laws support it, because when the banks don’t get their way (as we learned in 2008), they have no qualms about crashing the economy out of spite.

So no, don’t “trust but verify.”  Investigate but audit sounds more likely.  You don’t trust the neighborhood meth-head, since he’s proven to be unreliable.  What drugs do you need to be on to think that trusting the banks is the right move, especially when they intentionally make the “verify” part impossible?

Seriously, the quotes from bankers above boil down to, “ignore the reported facts and accept our fiction instead.”

As Dylan Ratigan says: “There is a 600 Trillion dollar “swaps” market in the dark”...
...hmmmm…in the dark—-why?  In the dark is the opposite of transparency…Why don’t they like transparency?  Because their enterprises are criminal…and criminals like to hide.

This is why Elizabeth Warren helped create the CFPB…lets hope it actually works…but I’m not holding my breath.

Mr Eisinger:

PEOPLE ARE GETTING THROWN OUT OF THEIR HOUSES AND KILLING THEMSELVES OVER UNSECURED DEBT—-it has to STOP…the TRUTH must get out—-please help to get the WHOLE truth out—-I am begging you…

Mas­sive cover-up is and has been perpetrate­d.

info from commenter—-who has the physical proof:

“As to subprime (refinance AND jumbo purchase), — nothing more than collection rights were securitize­d. Remember, securitiza­tion is simply a method of pass-throu­gh of CURRENT cash flows. Anything with a cash flow can be securitize­d. The problem is — that securitiza­tion is meaningles­s as to the creditor. Security investors — and trustees — in any capacity — are NEVER the lender/cre­ditor.
The fraud lies in the securitiza­tion fraud “process” — and the means by which the “loan” was procured. The “loan” — in subprime — was never a “loan” at all — at least NOT a secured loan — by mortgage or DOT…NEVER went “into” any TRUSTS…T­hus, unsecured and dischargea­ble by BK.”

Jesse, please contact me and I can put you in touch with this source.

We need justice for the 99% & the SEC needs to prosecute, not settle!

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)