Monday, February 1, 2010

Wells Fargo Shuns Carry-Trade, Braces for Risk of Higher Rates

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.

The nation’s fourth-largest bank, whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., reduced investments in mostly fixed-income securities by $34 billion in 2009’s 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.

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.

“The bias is for higher rates,” Chief Executive Officer John Stumpf, 56, said on the company’s fourth-quarter earnings call. “We’re willing to wait for that to happen. We think that’s the better trade.”

Stumpf’s stance may put him at odds with the Fed, which said Jan. 27 that it would keep rates low for an “extended period.” The majority of traders see no increase before the September policy meeting, according to futures traded on the Chicago Board of Trade.

Wells Isn’t ‘Speculating’

“I applaud Wells,” said Chris Whalen, managing director of Institutional Risk Analytics in Torrance, California. “The other three are speculating, taking a position on risk, and Wells is not.”

JPMorgan CEO Jamie Dimon told analysts on the fourth- quarter earnings call that the bank’s exposure to rising rates was “way down” after having been high.

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