Thread regarding Wells Fargo & Co. layoffs

the hidden risk of CLOs... and WFC has over 1,000,000,000

https://thereformedbroker.com/2020/06/14/frank-partnoy-on-the-hidden-systemic-risk-of-leveraged-loans/

I wonder if this is the core reason that results of the stress test they scored so poorly....

From tfa:

The banks themselves may reveal that their CLO investments are larger than was previously understood. In fact, we’re already seeing this happen. On May 5, Wells Fargo disclosed $7.7 billion worth of CLOs in a different corner of its balance sheet than the $29.7 billion I’d found in its annual report. As defaults pile up, the Mnuchin-Powell view that leveraged loans can’t harm the financial system will be exposed as wishful thinking.

Thus far, I’ve focused on CLOs because they are the most troubling assets held by the banks. But they are also emblematic of other complex and artificial products that banks have stashed on—and off—their balance sheets. Later this year, banks may very well report quarterly losses that are much worse than anticipated. The details will include a dizzying array of transactions that will recall not only the housing crisis, but the Enron scandal of the early 2000s. Remember all those subsidiaries Enron created (many of them infamously named after Star Wars characters) to keep risky bets off the energy firm’s financial statements? The big banks use similar structures, called “variable interest entities”—companies established largely to hold off-the-books positions. Wells Fargo has more than $1 trillion of VIE assets, about which we currently know very little, because reporting requirements are opaque. But one popular investment held in VIEs is securities backed by commercial mortgages, such as loans to shopping malls and office parks—two categories of borrowers experiencing severe strain as a result of the pandemic.

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| 1191 views | | 3 replies (last July 10, 2020) | Reply
Post ID: @OP+15SWQaz2

3 replies (most recent on top)

Nothing to see here - refer to Nathan Tankus article from June 11, 2020.

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Post ID: @jxr+15SWQaz2

Doesn’t it depend which tranche of CLO Wells has? BofA is buy the really crummy stuff at 20 cents on the dollar.

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Post ID: @bck+15SWQaz2

CLOs are a very small part of WFC loan book relative to peers. WFC scored lower in stress tests because unlike its money center peers (JPM, BAC, and C), WFC has a significantly larger loan book in all highly COVID19 affected areas: airlines, c-sinos, hotels, oil & gas, commercial real estate, and retail. As a result, the ongoing stress of these loans will be larger than peers. JPM, BAC, and C have more CLOs as a percentage of their loan book.

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Post ID: @pev+15SWQaz2

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