Tuesday, November 13, 2007

Wachovia and The Rest of Banking Just Fine

Despite a recent $1.1 billion write on on mortgage backed securities, business at Wachovia (WB) is just fine.

Wachovia's chief risk officer, Don Truslow said recently regarding consumer loans,"The housing market certainly has been deteriorating very quickly in certain parts of the country, and we are not immune from that deterioration."

But, buffering Wachovia from some of the more severe declines other institutions are seeing is the acquisition of option-ARM lender Golden West Financial last year. Truslow said the bank continues to take comfort from the historically low level of charge-offs in the Golden West portfolio. Even in a "worse case scenario" in which the amount of bad loans in Golden West's portfolio doubled to the high levels hit in the mid-1990s, the business "is still a very profitable and attractive business for us," said Truslow. How profitable? The segment has accounted for $2.1 billion in pre-tax profits during the first nine months of 2007.

The asset backed institutions like Bank of America (BAC), Citigroup (C) and Wachovia will weather this current situation fine. Those like Countrywide (CFC) who rely almost 100% on credit markets to finance its operations, will see pain from it for considerably longer. Scores have already close operations and in a "flight to quality" scenario, the big institutions will pick up the pieces on even more favorable terms.

News today that Blackstone (BX) is forming a unit to look at the current CDO markets in a desire to "go long" on it ought to be a sign that these instruments ought to be currently valued appropriately. If that is so and investors begin to by them, then the value of them has nowhere to go but up. When they go up the end result will be the opposite of what we have seen the past two months.

Everything still has a bottom and as Citigroup CFO Gary Crittendon remarked recently "it is strange to see these things valued below their cash flows". Simply put, the value lowering has been overdone.

Investors are treating the banks like they are all Countrywide's and on the precipice of failure. Nothing could be further from the truth. Bank after bank has commented on the strength of every other facet of their business and for an operation like Citigroup, almost 60% of its profits are coming from international activities that have no relation to US housing.

Does that mean there will be no pain? Of course not. What it does mean is the current dividend yields, with the exception of Washington Mutual (WM), many now around or well over 6% are safe and the businesses will rebound.

I keep repeating Buffett over and over in my head "buy fear"....and because of it we bought Wachovia shares and added to our Citigroup holdings recently. Both are yielding 6.5% and are doing just fine. It may take a while to pay off but it will, of that I am sure.

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