Top 10 at 10: Problems at Wells Fargo?; Farm sector's NZ$1 bln-plus capital raising bill; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments in the comments below or please send suggestions for Monday's Top 10 at 10 to bernard.hickey@interest.co.nz. We lurrrrvvee powerpoint at interest.co.nz 1. This story may explain why the US stock market has been suspiciously strong of late. Reuters reported that over the last two days investors have pulled US$55 billion out of money market funds there ahead of the expiry tonight of the US Federal Government's guarantee. This guarantee was slapped on in the mad days after Lehman collapsed and the Reserve Primary fund (packed with Lehman junk) 'broke the buck'.

Investors took out a total of $55 billion from money market funds on Tuesday and Wednesday, far more than usual, Peter Crane, president of fund-watcher Crane Data LLC, said in an interview. "There's a glimmer of evidence that there is money leaving because of the end of the guarantee," Crane said. Still, Crane and other industry analysts said they do not expect panicked withdrawals since investors have had months to prepare for the end of the insurance program. "I think that folks who wanted out of money funds have already taken their cash and put it elsewhere," said Connie Bugbee, managing editor of iMoneyNet, another research firm. According to Crane and iMoneyNet, money funds held just under $3.5 trillion as of Sept. 15, down from a peak of $3.9 trillion in mid-January. Crane and Bugbee said they expect steady outflows from the funds as investors continue to move to stocks and bonds, to as little at $3.1 trillion next year, Crane said.

2. The drums are beating about big problems inside the commercial loan books and derivatives books at Wells Fargo, one of the big 4 'too big to fail' banks left in America. Terri Buhl at bankimplode.com (great website name) has what seems to be an exclusive about the problems at Wells Fargo HT Troy Barsten via email.

In order to sort through the disaster that is Wells Fargo's (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books"¦ and they are shocked with what they are seeing. Not only do the bank's outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank. According to the New York Post, Harry Markopolos, the most prominent whistleblower on Bernie Madoff, gave a speech this summer at the Greek Orthodox Church in Southampton predicting more major scandals will soon be revealed about the unregulated, $600 trillion, credit default swap market that Wachovia/Wells is playing in. One senior member of Wells Fargo's commercial loan group who deals directly with the quandary, who spoke on the condition of anonymity, said, "One third of this commercial portfolio we took on from Wachovia is impaired and needs to be completely rewritten. I've just hired five more guys and we can't keep up with the volume of defaults. Southeast Florida and Tampa are serious trouble spots." Wachovia's third quarter 2008 filings, which reflect their assets three days before Wells Fargo agreed to the acquisition, shows the bank held a whopping $230 billion in its commercial loan portfolio. Current figures show Wells' 90-day defaults on its commercial portfolio are rapidly growing. According to data from WLMlab.com which tracks financial numbers that Wells files with its regulators, the bank's Construction and Development portfolio, with $38.2 billion in loans, is defaulting at a level eight times greater than the rest of the nation's banks, as of June 30th.  Alarming, right?

Yes. 3. The Reserve Bank of Australia's annual report came out yesterday and made for some interesting reading. The Australian reported that Australians hoarded an extra A$4 billion in cash in the final frenzied few days before Kevin Rudd magicked up a deposit guarantee scheme. No wonder he was in such a hurry. The Australian uses the atomic bomb combination of words for financial journalists; 'panic run'. It's lucky we didn't know the following at the time...

At the peak of the global financial crisis, the run threatened to exhaust the Reserve Bank's stocks of $50 and $100 notes and it had to print more to meet the extraordinary demand, the bank's annual report released yesterday shows. "The Reserve Bank responded to a surge in demand for banknotes around the time of the global banking crisis, as some depositors withdrew cash from banks," governor Glenn Stevens wrote in his foreword to the report.

4. Meanwhile the Sydney Morning Herald reported the Reserve Bank of Australia will pay a record A$5.2 billion dividend to the government after making out like a bandit while currency trading. Maybe our Reserve Bank needs to take some trading lessons from their Australian counterparts? You listening Simon Tyler?

The bank's $8.8 billion profit is far in excess of anything it has ever made in its 50-year history and came as a result of a decision to pour billions into supporting the Australian dollar late last year as it slid even faster than it had during the ''Banana Republic'' crisis of the mid-1980s. The bank says that as the dollar touched US60 cents in late October, it became concerned that ''the breakdown in market conditions itself had become a significant factor in the increasingly rapid depreciation''. To ''break this dynamic'' it bought $3.8 billion of Australian dollars on exchange markets, helping drive the price towards its present US87 cents, netting a cash profit of $4.4 billion as it sold dollars and an extra paper profit of $2.3 billion from revaluation of its assets.

5. Here comes a bear, a very hairy bear, a very hairy, scary bear...HT Blair Rogers via Twitter 6. Chris Martenson makes some excellent points about just how much America has borrowed and spent to shove an adrenalin needle into the heart of the American economy. But it's only adrenalin and the heart problems remain. Martenson calculates that the US government has borrowed and spent US$1.7 trillion to produce a GDP increase of US$420 billion. HT Nikki Pender in yesterday's comment stream.

Where we faced a pretty dramatic set of events associated with the probable (and necessary) implosion of big chunks of an entirely too-bloated and redundant financial system, our fiscal and monetary authorities have willingly risked the US's solid credit rating for a temporary reprieve from economic pain. Essentially, we traded a rapid return to growth (at any cost) for an increased chance of a future monetary crisis.  There are others who share this view, such as William White, the former chief economist at the BIS, who worries that past problems have been traded for future imbalances that are larger than what they replaced.

7. The European Union has announced a whole new aid package for dairy farmers after big protests in recent days, BBC reported. Someone needs to send them a textbook on Smoot Hawley...and then confiscate all those flash bloody tractors they use to dump manure and milk in awkward places.

The European Commission says it will change EU state aid rules to let member states pay each farmer up to 15,000 euros (£13,000) in temporary aid. The Commission says it expects to spend an extra 600m euros this year on market measures to support dairy farmers. In Belgium on Wednesday angry farmers dumped three million litres (660,000 gallons) of milk on fields. French and German farmers have also dumped milk and blocked deliveries in frustration at the low prices for dairy produce. Farmers say they want the EU to freeze planned increases in production quotas, because boosting the supply on the market lowers prices further.

8. This whole PGG Wrightson-Silver Fern Farms-Uruquay Farming Systems-South Canterbury Finace-PGC capital call bill just keeps getting bigger and bigger. The ODT speculates that one of the reasons Silver Farms is selling its 10 million shares in PGG Wrightson is that its own NZ$128 million capital raising is going slowly. We don't know the numbers yet, but all this cash raising could total more than NZ$600 million. And that's before Fonterra raises north of NZ$500 million from its dairy farmer shareholders. I hope the banks are ready to lend a whole lot more to farming. I wonder if the Reserve Bank is all that happy about this....

Forsyth Barr broker Peter Young said when Silver Fern Farms (SFF) received the shares in April, it stated it intended being a long-term shareholder in PGG Wrightson, but the latest announcement suggested it needed cash, in the face of tighter credit markets and banks less willing to provide seasonal finance. SFF was in the last week of raising capital through a share issue with shareholders and Mr Young said the share sale might indicate a low take-up of the offer and a need to sell non-core assets to cover any shortfall.

9. This is an interesting piece from Diana Olick at CNBC that suggests US banks are either holding on to houses in foreclosure to avoid depressing the market and having to own up to massive losses, or are just plain swamped with foreclosures and haven't gotten around to it. It seems a whole new swathe of foreclosures is going to depress house prices. HT Troy Barsten via email. 10. Here's more on the ominousness at Wells Fargo from Karl Denninger at The Market Ticker, following up on the BankImplode piece. HT John Henderson via email. Denninger wonders if Wells Fargo is paying dividends out of profits made by storing up capitalising interest from zombie developments. Where have we seen that before....Bridgecorp, Capital and Merchant, Hanover....

Of course Wells could try to sell the loans off in the market.  Or can they?  How much is the underlying property worth?  Nobody in their right mind is going to give them more than the current value of the property less the discounted cash-flow remaining on the note.  What sort of damage would that do to Wells' balance sheet?  Can they absorb it even if they wanted to (which from the lack of sales reported in the market they clearly don't!)

Oh yeah, and under the wonderful "accounting rules" banks don't have to disclose the CDS they wrote against those tranches on their balance sheet nor provide maximum exposure - until and unless they blow up in their face, when suddenly that liability "magically re-appears."

This sort of crap is exactly the kind of accounting game that I have been hollering about for more than two years.  The fact that these numbers remain undisclosed and are not being volunteered tells me that the banks are likely hiding huge - possibly critical - contingent losses which they have every reason to believe will become realized.

And by the way, this problem is almost certainly not specific to Wachovia/Wells.

11. Bonus! The battle within the US Federal Reserve about its exit strategy is heating up, Reuters reported. HT Alex via IM This is a battle to watch closely.

Heightened prospects for a strong resurgence -- rather than the sluggish rebound many still envision -- have led some officials to worry an inordinate delay in scaling back the enormous support the Fed has given the economy could squander its inflation-fighting credibility. Others, however, continue to focus on high unemployment and the slow downward drift in measures of U.S. core inflation, a camp that is likely to hold sway when the policy-setting Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday. "In my career, I have never witnessed a situation like the one that exists now, when views about inflation risks have coalesced into two diametrically opposed camps," San Francisco Federal Reserve Bank President Janet Yellen said on Monday. The course of the debate will drive the Fed's decision on how quickly and aggressively to remove its extraordinary programs aimed at reviving lending and hiring.