{"id":258971,"date":"2010-02-01T01:00:00","date_gmt":"2010-02-01T06:00:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-1933464584788953327"},"modified":"2010-02-01T01:03:32","modified_gmt":"2010-02-01T06:03:32","slug":"businessweek-wells-fargo-shuns-carry-trade-braces-for-risk-of-higher-rates","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/258971","title":{"rendered":"BUSINESSWEEK: Wells Fargo Shuns Carry-Trade, Braces for Risk of Higher Rates"},"content":{"rendered":"

February 01, 2010, 12:42 AM EST<\/span><\/p>\n

By Dakin Campbell<\/p>\n

Feb. 1 (Bloomberg) — Wells Fargo & Co., unlike its three biggest competitors, is so convinced interest rates will rise that it sacrificed as much as $1 billion last year cutting back on fixed-income investments.<\/p>\n

The nation\u2019s fourth-largest bank, whose biggest shareholder is Warren Buffett\u2019s Berkshire Hathaway Inc., reduced investments in mostly fixed-income securities by $34 billion in 2009\u2019s second half, company filings show. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. boosted their holdings by an average of $35.5 billion.<\/p>\n

By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, San Francisco-based Wells Fargo aims to protect against losses when rates rise. The three other lenders increased investments on the theory that profit will outpace any future losses.<\/p>\n

\u201cThe bias is for higher rates,\u201d Chief Executive Officer John Stumpf, 56, said on the company\u2019s fourth-quarter earnings call. \u201cWe\u2019re willing to wait for that to happen. We think that\u2019s the better trade.\u201d<\/p>\n

Stumpf\u2019s stance may put him at odds with the Fed, which said Jan. 27 that it would keep rates low for an \u201cextended period.\u201d The majority of traders see no increase before the September policy meeting, according to futures traded on the Chicago Board of Trade.<\/p>\n

Wells Isn\u2019t \u2018Speculating\u2019<\/p>\n

\u201cI applaud Wells,\u201d said Chris Whalen, managing director of Institutional Risk Analytics in Torrance, California. \u201cThe other three are speculating, taking a position on risk, and Wells is not.\u201d<\/p>\n

JPMorgan CEO Jamie Dimon told analysts on the fourth- quarter earnings call that the bank\u2019s exposure to rising rates was \u201cway down\u201d after having been high.<\/p>\n

\u201cI wouldn\u2019t worry about it that much,\u201d Dimon, 53, said on the call. JPMorgan spokesman Joseph Evangelisti declined to comment beyond Dimon\u2019s remarks.<\/p>\n

Wells Fargo had an investment portfolio of $172.7 billion at the end of 2009 after the reductions. Citigroup led increases at the three largest U.S. banks, adding $47.5 billion of investments in securities to bring it to $254.6 billion. Citigroup spokesman Jon Diat declined to comment.<\/p>\n

Bank of America\u2019s investment portfolio grew to $301.6 billion at the end of the year from $257.5 billion in June, according to company filings. In the company\u2019s fourth-quarter earnings call, Chief Financial Officer Joe Price said the bank would benefit from rising rates because it would receive more income from loans and other interest-bearing assets. Spokesman Scott Silvestri declined to elaborate.<\/p>\n

Bankers\u2019 \u2018Complacency\u2019<\/p>\n

Some banks may not be taking the danger of rising rates seriously enough, says Nancy Bush, an independent bank analyst at NAB Research LLC in Annandale, New Jersey.<\/p>\n

\u201cThere is a great deal of complacency right now that rates are going to stay low for a long time,\u201d she said. \u201cWhen that happens you always run the risk of a shock.\u201d<\/p>\n

Wells Fargo is paying a price for playing it safe.<\/p>\n

If the bank had left its investments unchanged at the end of June, it would have earned about $1.15 billion of pretax income from the carry trade during the next six months, assuming an average yield of 6.78 percent on its debt securities and a top funding cost of 3.40 percent. The yield and funding costs are based on company filings.<\/p>\n

Loan Demand Lags<\/p>\n

Chief Financial Officer Howard Atkins said Wells Fargo is willing to forgo short-term income to avoid the risks of bigger losses down the road. \u201cWe don\u2019t believe in the carry trade,\u201d he said on the conference call. As one of the nation\u2019s two biggest mortgage lenders with Bank of America, Wells Fargo could suffer if higher rates damp demand for home loans.<\/p>\n

Banks have turned to investments in securities in part because of a lack of loan demand from consumers and businesses. The recession led households to reduce debt and increase savings, leaving banks with a larger pool of deposits and fewer options to deploy them.<\/p>\n

\u201cBanks are experiencing strong deposit growth and weak loan demand and they have nothing else to do but to buy bonds,\u201d said Jeffrey Caughron, an associate partner in Oklahoma City at Baker Group Ltd., which advises community banks investing $25 billion.<\/p>\n

Some banks bought bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae, taking advantage of a Fed program to purchase $1.25 trillion of the securities that pushed up prices. The program is now slated to end in March, and the Fed reiterated its intention to do so in its Jan. 27 statement. Without government purchases, the bonds may fall in value.<\/p>\n

Interest-Rate Risk<\/p>\n

\u201cThe composition of available-for-sale securities portfolios has stayed mostly in agency MBS,\u201d CreditSights Inc. analysts led by David Hendler wrote in Jan. 19 report. Those bonds \u201ccan be extremely tricky to manage in a rising rate environment,\u201d they wrote.<\/p>\n

Federal Deposit Insurance Corp. Chairman Sheila Bair urged U.S. banks to prepare for losses driven by an end to low interest rates, saying rapid rate changes are \u201cworrisome\u201d because they may harm lending and earnings.<\/p>\n

\u201cIf there is evidence that this risk is building, I think we need to know more about it and how we can defuse it before the pressure causes problems for insured banks and thrifts,\u201d Bair said Jan. 29 at an FDIC conference in Arlington, Virginia.<\/p>\n

–With assistance from Jody Shenn in New York. Editors: Eric Gelman, Alec McCabe.<\/p>\n

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