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The numbers in millions I used in yesterday’s newsletter are pretty well the real numbers, but you need to convert the millions to billions for Wells Fargo in 1990. It had lent out $49bn and owed depositors and others $46.5bn. Common stockholders’ equity was about $2.5bn. It had 455 branches, 19,500 staff and had made around 5% net interest margin in the late 1980s and in 1990. The return on common stockholder’s equity was about 24%.
But it was vulnerable. Its lending consisted of $14bn lent to commercial businesses and farmers; $4bn for real estate construction of offices, shopping centres, apartments, etc; $12bn for real estate mortgages (e.g. 70,000 Californian families); $8bn on consumer finance, e.g. credit cards, and; another $1bn or so on other types of lending.
Imagine if you will – and many people did in 1990 – that many of the construction loans it had made were not going to be repaid because the developer could no longer make a profit by completing the building and chose bankruptcy instead, or that bad debt on credit cards rose as people were made redundant. You can see that it wouldn’t take a large proportion of these borrowers to renege on their contracts for Wells Fargo’s equity buffer to be used up.
Wells Fargo going down
In 1989 Wells Fargo shares had reached $87.40 as it reported fast growth in lending and exuded confidence about the future. But by the third quarter of 1990 it touched a low of $42.75 as the troubles at many banks became apparent – the black boxes were exposed in all their ugliness.
Investors in Californian banks had recently witnessed the banking crisis over in Texas, resulting in 349 bank failures. The late 1970s/early 1980s boom in oil and gas prices and output encouraged banks to lend to resource companies, real estate developers and families. Buildings went up everywhere, until, in 1987, it was apparent that supply far outstripped demand, e.g. in Dallas, Austin, Houston and San Antonio office vacancy rates were around 25% – 30%. The oil price had fallen but property developments had continued. Once the music stopped, unable to obtain cash, overstretched construction companies and developers couldn’t repay loans.
There was also a boom in residential and commercial real estate markets in New England during the 1980s fuelled by a strong regional economy. But the boom eventually led to over-building and irrational speculation in property assets. Late in the decade boom turned to bust taking down dozens of banks.
The banking bears were out looking for the next banking-crisis
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