Ryan Leggio: One bank you write about in your book is Wells Fargo. I think that was a name you were once short, then declined down to around $10, you went long. Is your intrinsic value of Wells Fargo still somewhere in the $30s and what do you think of the bank today?
Whitney Tilson: Sure. The stock is around $30 today; it has tripled since we wrote about it in our book. Very rare that we short something from $30 to $10 and then go around and ride it on the long side from $10 to $30. It worked out nicely.
Our best guess actually is that Wells Fargo, once they return to normalized loses levels, is a $60 stock. We think they can do $5 a share of earnings, and easily a franchise of that quality would trade at 12 times earning, so that is $60 right there.
The problem is how long is it going to take to get there and how ugly might things get in the meantime. So we have been trimming most of our Wells Fargo stock because, while we still think there is a double on the upside, it might take five years to get there.
It is a great franchise, highly profitable, but they have exposure to nearly everything you wouldn't want to have exposure to today. Option arms, HELOCs, jumbo prime, the commercial real estate portfolio. We think there is likely to be numerous years of substantially higher-than-normal losses that are going to act as a damper on the stock.
We are sort of hopeful, actually, the stock, we might get a chance to buy it under $20, and then we would back up the truck. We think it's a great business in the long term, but there could be a rocky road to get to that $60 five years from now.
Leggio: So it sounds like even if you think Wells Fargo is worth $60, at around $30 today that is maybe not enough margin of safety for you?
Tilson: There are plenty of stocks I think can double in five years that I don't think ... Our biggest concern is that we think a lot of investors believe that housing prices have bottomed, that the losses from the financial system are going to start declining fairly rapidly from today's high levels, that we are most of the way through the unwinding in this bubble.
Our belief is that we have at least another couple of years of very high losses, and home prices are going to fall over the next year. So when investors wake up to that fact, all financial stocks, all housing-related real estate stocks could take a beating, and we don't want to be in the way of that train wreck.
And by train wreck, I don't mean the chaos of a year ago and bankruptcies, or whatever. I just think a lot of stocks are priced for housing prices not falling any further and losses starting to decline quickly from here. And I don't think that is a likely scenario, so either we're trimming our longs and anything that has exposure there, and we have actually been adding to some of our shorts as well.