Wells Fargo Is Broke

Wells Fargo made close to $3 billion last quarter, supposedly, so all is well with the banking sector according to the happy-face guys. The reality however isn't so good for Wells Fargo or America.

Wells Fargo may have posted a record profit recently, but it’s important to note that left to its own devices the bank would have gone out of business already and not be posting any profits at all. Indeed, it appears to be undercapitalized by tens of billions of dollars:

Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.

This is why nothing you near from the financial sector about how all’s well should be taken too seriously. It’s true that given very bank-friendly monetary policy it’s easy for banks to run an operating profit. But most of these large banks are zombies—insolvent. They’re only able to run an operating profit because they’re not going out of business and being liquidated. And the reason they’re not being liquidated is government guarantees. It’s as if I had a profitable business selling cookies, except I didn’t actually have any cookies to sell and was just putting government-provided cookies in boxes, then bragging about how profitable my company is and how the government should stop hassling me about paying myself a bonus.

So, it made $3 billion when it owes $25 billion, and could end up owing tens of billions more...and Wells Fargo is held up as an example of a profitable, stable bank.

The whole system is rotten. The reality is that pretending the banks are solvent will only lead to crushing losses in the trillions before all is said and done. Wall Street is currently living a fantasy, and so is the global financial system. The banks are insolvent, our financial system is insolvent, and our country is insolvent.

When this last bubble pops, it'll take our country with it. Even Plan N may not be enough, but it's our only real hope right now. Sadly, Obama has no intention of implementing it, today he was arguing that he's saving the taxpayer money by not doing it.

On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.

If President Obama truly believes this, then Plan N is not going to happen. As such, our economy is now fully vested in the Geithner Plan. Pray it works. I don't think it will.

When and if it fails, America is in dire danger.

[UPDATE] At Big Picture, Barry Ritholtz explains how Goldman Sachs did mostly the same thing with fake earnings numbers by smiply ignoring all their December losses.