We're In The Eye Of A Global Financial Hurricane

Submitted by Tyler Durden on 05/23/2016 08:30 -0400
We're In The Eye Of A Global Financial Hurricane
Submitted by Charles Hugh-Smith via OfTwoMinds blog,
The only "growth" we're experiencing are the financial cancers of systemic risk and financialization's soaring wealth/income inequality.
The Keynesian gods have failed, and as a result we're in the eye of a global financial hurricane.

The Keynesian god of growth has failed.

The Keynesian god of borrowing from the future to fund today's consumption has failed.
The Keynesian god of monetary stimulus / financialization has failed.
Every major central bank and state worships these Keynesian idols:
1. Growth. (Never mind the cost or what kind of growth--all growth is good, even the financial equivalent of aggressive cancer).
2. Borrowing from the future to fund today's keg party, worthless college diploma, particle board bookcase, stock buy-back, etc. (oops, I mean "investment")--a.k.a. deficit spending which is a polite way of saying this unsavory truth: stealing from our children and grandchildren to fund our lifestyles today.
3. Monetary stimulus / financialization. If private investment sags (because there are few attractive investments at today's nosebleed valuations and few attractive investments in a global economy burdened with massive over-production and over-capacity), drop interest rates to zero (or below zero) to "stimulate" new borrowing... for whatever: global carry trades, bat guano derivatives, etc.
Here is my definition of Financialization:
Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.
That is a mouthful, so let's break it into bite-sized chunks.

Home mortgages are a good example of how financialization increases financial profits by jacking up risk and distributing it to suckers who don't recognize the potential for staggering losses.
In the good old days, home mortgages were safe and dull: banks and savings and loans institutions issued the mortgages and kept the loans on their books, earning a stable return for the 30 years of the mortgage's term.
Then the financialization machine revolutionized the home mortgage business to increase profits. The first step was to generate entire new types of mortgages with higher profit margins than conventional mortgages. These included no-down payment mortgages (liar loans), no-interest-for-the-first-few-years mortgages, adjustable-rate mortgages, home equity lines of credit, and so on.
This broadening of options (and risks) greatly expanded the pool of people who qualified for a mortgage. In the old days, only those with sterling credit qualified for a home mortgage. In the financialized realm, almost anyone with a pulse could qualify for an exotic mortgage.
The interest rate, risk and profit margins were all much higher for the originators. What's not to like? Well, the risk of default is a problem. Defaults trigger losses.
Financialization's solution: package the risk in safe-looking securities and offload the risk onto suckers and marks. Securitizing mortgages enabled loan originators to skim the origination fees and profits up front and then offload the risk of default and loss onto buyers of the mortgage securities.
Securitization was tailor-made for hiding risk deep inside apparently low-risk pools of mortgages and rigging the tranches to maximize profits for the packagers at the expense of the unwary buyers, who bought high-risk securities under the false premise that they were "safe home mortgages."
Financialization-- which can only expand to dominate an economy if it is supported by a central bank bent on expanding credit--has two inevitable and highly toxic consequences:
-- Risk seeps into every nook and cranny of the financial system, greatly increasing the odds of a systemic domino reaction in financial meltdowns. This is precisely what we saw in the 2008-09 Global Financial Meltdown (GFM): supposedly "contained" subprime mortgages toppled dominoes left and right, bringing the entire risk-saturated system to its knees.
-- Extraordinary wealth and income inequality, as those closest to the central bank money/credit spigots can scoop up income-producing assets first at much lower costs than Mom and Pop Main Street investors.
The rising anger of the masses left behind by the central bank / financialization wealth harvesting machine is the direct result of Keynesian monetary stimulus that rewards debt-based speculative gambles by those closest to the cheap-credit spigots.
As I explain in my book Why Our Status Quo Failed and Is Beyond Reform, the only possible output of central bank monetary stimulus is financialization, and the only possible output of financialization is unprecedented wealth and income inequality.
The global financial system is in the eye of an unprecedented hurricane. While central bankers are congratulating themselves on their god-like mastery of Nature, and secretly praying to the idols of the Keynesian Cargo Cult every night, the inevitable consequence of borrowing from the future, the obsession with "growth" at any cost and financialization /monetary stimulus, a.k.a. the rich get richer thanks to central banks is systemic collapse.
Don't fall for the mainstream media and politicos' shuck-and-jive that all is well and "growth" will return any day now. The only "growth" we're experiencing are the financial cancers of systemic risk and financialization's soaring wealth/income inequality.

With A Historic -150% Net Short Position, Carl Icahn Is Betting On An Imminent Market Collapse

Submitted by Tyler Durden on 05/10/2016 09:58 -0400
http://www.zerohedge.com/news/2016-05-09/historic-150-net-short-position-carl-icahn-betting-imminent-market-collapse
Over the past year, based on his increasingly more dour media appearances, billionaire Carl Icahn had been getting progressively more bearish. At first, he was mostly pessimistic about junk bonds, saying last May that "what's even more dangerous than the actual stock market is the high yield market." As the year progressed his pessimism become more acute and in December he said that the "meltdown in high yield is just beginning." It culminated in February when he said on CNBC that a "day of reckoning is coming."
Some skeptics thought that Icahn was simply trying to scare investors into selling so he could load up on risk assets at cheaper prices, however that line of thought was quickly squashed two weeks ago when Icahn announced to the shock of ever Apple fanboy that several years after his "no brainer" investment in AAPL, Icahn had officially liquidated his entire stake.
As it turns out, Icahn's AAPL liquidation was just the appetizer of how truly bearish the legendary investor has become.
* * *
As readers will recall, when it comes to what we believe is one of the world's most bearish hedge funds, we traditionally highlight the net exposure of Horseman Global, which not only has been profitable for the past four years, it has done so while running a net short book. To the point, as of March 31, Horseman was net short by a record 98%.


As it turns out this was nothing compare to Icahn's latest net exposure.
In the just disclosed 10-Q of Icahn's investment vehicle, Icahn Enterprises LP in which the 80 year old holds a 90% stake, we find that as of March 31, Carl Icahn - who subsequently divested his entire long AAPL exposure - has been truly putting money, on the short side, where his mouth was in the past quarter. So much so that what on December 31, 2015 was a modest 25% net short, has since exploded into a gargantuan, and unprecedented for Icahn, 149% net short position.

This is the result of a relatively flat long gross exposure of 164% resulting from a 156% equity and 8% credit long (a combined long exposure which is certainly far lower following the AAPL liquidation), and a soaring short book which has exploded from 150% as of March 31, 2015 to a whopping 313% one year later, on the back of 277% in gross short equity exposure and 36% short credit.


Putting this number in context, in the history of IEP, not only has Icahn never been anywhere near this short, but just one year ago when he first started complaining about stocks, he was still 4% net long. Thos days are gone, and starting in Q3 and Q4, Icahn proceeded to wage into net short territory, with roughly -25% exposure, a number that has increased a record six-fold in just the last quarter!
What is just as notable is the dramatic leverage involved on both sides of the flatline, but nothing compares to the near 3x equity leverage on the short side (this is not CDS). As a reminder, Icahn Enterprises used to be run as a hedge fund with outside investors, but Icahn returned outside money in 2011, leaving IEP and Icahn as the two dominant investors.  According to Barron's, the entire fund appears to be about $5.8 billion, with $4 billion coming from Icahn personally. Which means that this is a very substantial bet in dollar terms.
When asked about this unprecedented bearish position, Icahn Enterprises CEO Keith Cozza said during the May 5 earnings call that "Carl has been very vocal in recent weeks in the media about his negative views." He certainly has been, although many though he was merely exagerating. He was not.
"We’re much more concerned about the market going down 20% than we are it going up 20%. And so the significant weighting to the short side reflects that," Cozza added. 
Icahn was not personally present at the conference call, however now that his bet on what is arguably a massive market crash has become public, we are confident he will be on both CNBC and Bloomberg TV in the coming days if not hours, to provide damage control and to avoid a panic as mom and pop investors scramble, and wonder just what does one of the world's most astute investors see that they don't. 
Source

"The Damage Could Be Massive" - How Central Banks Trapped The World In Bonds

Submitted by Tyler Durden on 04/25/2016 13:15 -0400
http://www.zerohedge.com/news/2016-04-25/damage-could-be-massive-how-central-banks-have-trapped-world-bonds
Yields on $7.8 trillion of government bonds have been driven below zero by worries over global growth, forcing investors looking for income to flood into debt with maturities of as long as 100 years. Worse still, as Bloomberg reports, central banks’ policy is exacerbating matters, as the unprecedented debt purchases to spur their economies have soaked up supply and left would-be buyers with few options. This has driven the 'duration' - or risk sensitivity - of the bond market to a record high, meaning, as one CIO exclaimed, even with a small increase in rates "the positions are so huge that the damage can be massive... People are complacent."
Decelerating economic growth worldwide, combined with more aggressive stimulus measures by the Bank of Japan and the European Central Bank, pushed average yields on $48 trillion of debt securities in the BofA Merrill Lynch Global Broad Market Index to a record-low 1.29 percent this month, compared with 1.38 percent currently.

Such low yields are unnerving some of the most famous names in the bond market.

Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund, said in a recent tweet that a tiny move in Japanese 30-year government bonds could wipe “out an entire year’s income.”

It won’t take much of a backup to inflict outsize losses.
The effective duration of the global bond market, which is measured in years and determines how much prices are likely to change when interest rates move, surged to an all-time high of 6.84 years in April.
That translates into a 6.84 percent decline in price for every percentage-point increase in yields.


Simply put, a half-percentage point increase would result in a loss of about $1.6 trillion in the global bond market, according to calculations based on data compiled by Bank of America Corp.

This year alone, the danger of owning debt has surged by the most since 2010, raising concerns from heavyweights such as Bill Gross. It’s also left some of the world’s biggest bond funds, including BlackRock Inc. and Allianz Global Investors, at odds over the benefits of buying longer-dated bonds.

“It takes a fairly small move out in rates on the long-end to wipe out your annual return,” said Thomas Wacker, the head of credit of the Chief Investment Office at UBS Wealth Management, which oversees $2 trillion in assets. Longer-maturity debt is “not something we are particularly keen on,” he said.

Investors continuing to buy bonds even when they pay next to nothing suggests deep concern over the state of the global economy. This month, the International Monetary Fund warned the threat of worldwide stagnation was rising because economic expansion has been so tepid for so long. It also chopped its 2016 growth forecast to 3.2 percent from 3.4 percent in January.

“The price of these bonds increase at an accelerating rate,” said Brian Tomlinson, Frankfurt-based global fixed-income manager at Allianz, which oversees about $500 billion, referring to the market’s longest-term issues. “Economic growth continues to disappoint globally.”

So between the deflationary spiral that historic zombie-reviving central bank policy has enabled and the outlook for more zombifying central bank 'stimulation' ahead, the central planners have cornered the world into ever risky "sovereign" bonds and while that risk hits record highs, The Fed is trying to topple the applecart (at least with its jawboning) whioch - as we have shown above - would leave an even larger hole in both bank and public pension fund balance sheets.

“People are complacent,” Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA, which oversees more than $17 billion, said from Milan. “Time is against the long end of the bond market. Even if an increase in bond yields may not be so strong, the positions are so huge that the damage can be massive.”

Wells Fargo Finally Reveals Its Dire Energy Exposure: $32 Billion To Junk-Rated Oil And Gas Companies

Submitted by Tyler Durden on 04/14/2016 10:25 -0400
http://www.zerohedge.com/news/2016-04-14/wells-fargo-has-problem-32-billion-junk-rated-energy-exposure
Following its recent critical profile by Bloomberg which earlier this week penned, "Wells Fargo Misjudged the Risks of Energy Financing", which came about 4 months after we wrote an almost identical report, the biggest US bank by market cap knew it had to reveal more than just the usual placeholder data in its investor presentation today. Sure enough, Warren Buffett's favorite bank finally opened its books more than usual as concerns built about its $17.4 billion in total outstanding oil and energy loans (at the end of 2015). This is what it revealed.
First, the big picture. As the chart below shows, Wells' net income has been consistently declining in the past year, with earnings of $5.5BN down from $5.8BN a year ago even as revenues grow 4% over the same period.

Here is the reason: Net Interest Margin continues to decline, as a result of the continued curve flattening.


This ongoing decline in NIM is forcing Wells to issue ever more loans to maintain its average loan/yield constant. As the chart below shows, it is doing just that, with period end loans outstanding soaring by $86BN from a year ago to $947.3BN.


All of that, however has to do with the structural constraints of the economy, and the ongoing collapse in rates.
What about Wells' overall credit book? Here we find some curious observations here.
Net charge-offs rose to $886 million, up $55 million, or 7%, LQ on $87 million higher oil and gas portfolio losses. And yet, despite the abovementioned $17.8 billion (as of Q1) in loans to oil and energy and despite the deteriorating conditions, Wells only built reserves by a paltry $200 million reserve build in the quarter, resulting in a 0.38% net charge-off rate "as continued improvement in residential real estate was more than offset by higher oil and gas reserves." Will that reserve

Still it wasn't just energy related losses: Wells also revealed that commercial losses were 20 bps, up 4 bps LQ. while consumer losses of 57 bps, up 1 bp LQ
Just as interesting was Wells' disclosure of its Non performing assets, which jumped by $706 million to $13.5 billion, the biggest such increase since the crisis.

This was Wells' explanation:

• Nonaccrual loans increased $852 million on $1.1 billion higher oil and gas and $343 million from the addition of GE Capital loans, partially offset by lower residential and commercial real estate nonaccruals
• Acquired loans and leases from GE Capital acquisitions were marked to fair value in purchase accounting with no Allowance recorded with the closings
• Future allowance levels will be based on a variety of factors, including loan growth, portfolio performance and general economic conditions

Finally, we get to the real meat - Wells' Oil and Gas loan portfolio and total exposure. Here are the details:
Oil and gas loan portfolio of $17.8 billion, or 1.9% of total loan outstandings

The total outstanding amount was up $474 million, or 3%, from the $17.4 billion in 4Q15 on drawn lines and the acquisition of $236 million in loans from GE Capital
Outstandings include $819 million second lien and $374 million of mezzanine loans
Wells reports that ~7%, or $1.2 billion, of outstandings to investment grade companies. This means that $16.6 bilion of Wells' outstanding loans are to junk-rated companies, something we flagged four months ago.
* * *
On the other hand, total exposure of $40.7 billion was down $1.3 billion, or 3%, reflecting declines across all 3 sectors from reductions to existing credit facilities and net charge-offs. As expected, Wells has decided to start trimming it overall exposure by collapsing credit lines.
But the punchline once again, is in the reminder of just how generous Wells has been in lending to junk-rated oil and gas companies in the recent past to compensate for its declining NIM: Wells reported that ~22%, or $8.8 billion, of exposure to investment grade companies, which means $32 billion is to junk-rated companies.
It also means that much more pain is in store for Wells in the coming quarters unless oil stages a dramatic comeback.
* * *
At this point Wells give an update of what it actually did in the first quarter.
First, it increased net chargeoffs by a paltry $204 million in 1Q16, up $87 million from 4Q15, "driven by deterioration in borrower financial performance and collateral values reflecting lower crude and natural gas prices"
While it did not need to explain, it adds that "all of the losses were in the E&P and services sectors Nonaccrual loans"
More troubling was the spike in Nonaccrual loans which more than doubled to $1.9 billion, up $1.1 billion from 4Q15 on "higher outstandings, weaker expectations for borrower cash flows reflecting lower collateral values, the run-off of hedges, less sponsor support and the closing of external liquidity sources, as well as protective draws" Once again, nearly all nonaccruals were in the E&P and services sectors.
Curiously, about 90% of nonaccruals remain current on interest and principal. This means that if and when the borrowers hit their funding cliff, the consequences will be severe.
Finally, Wells reports that it has taken $1.7 billion of allowance for credit losses allocated for oil and gas portfolio, which amount to 9.3% of total oil and gas loans outstanding.
So, here is the recap: $1.1 billion in reserves provisions (an increase of only $200MM in the quarter), a total of $1.9 billion in non-performing Oil and Gas assets, a $1.7 billion allowance for Oil and Gas credit losses, and a total of $32 billion in junk rated oil and gas exposure?
Something tells us that top chart showing Wells Fargo's declining net income will not get much better any time soon...
Source: Wells Fargo

Ignore Stocks, the REAL Crisis is Far Bigger and Far Worse

Submitted by Phoenix Capital Research on 01/28/2016 11:45 -0500

http://www.zerohedge.com/news/2016-01-28/ignore-stocks-real-crisis-far-bigger-and-far-worseInvestors today are focusing on the wrong asset class.

Stocks started off the year with one of the worst drops in recent memory. As of this morning the S&P 500 was down over 7% for the year thus far.

However, while stocks grab the headlines, it is the bond market that warrants the most attention.

The reason?

Firstly, size. The bond bubble is $100 trillion in size. To put this into perspective, the Tech Bubble, the single largest stock bubble in history relative to profits, was just $16 trillion in size.

Beyond this, there are $555 trillion derivatives trading based on interest rates (bond yields). So that $100 trillion in bonds is leveraged by an additional five to one.

In simple terms, as much as CNBC and others focus on stocks, the bond market, particularly the bond bubble is a much larger, more pressing problem.

Especially since it has begun to burst.

Junk bonds were the first “shoe to drop.” They’ve taken out their post-2009 bull market trendline (blue line) as well as critical support (green line).

Those who claim that this is primarily an issue for Oil Shale companies are wrong. The defaults are coming across the board with Energy companies accounting for less than 33% of defaults.

This was the fuse that set off the global debt bomb.

The next shoe to drop will be Emerging Market Bonds, specifically corporates.

Emerging Market corporations have over $3 trillion in excess debts according to the IMF. This is likely a conservative estimate. Globally the US Dollar carry trade is north of $9 trillion. And Emerging Market corporations were issuing US Dollar denominated debt at a staggering pace post-2009.

Now you may be asking, “if the bond bubble has burst, where are the headlines?”

Stock market bubbles take months to unfold. The Tech Bubble was isolated to one asset class (stocks) and even more specifically, one industry (Tech Stocks). It sill took three years to unfold.

Bonds, in contrast, are the bedrock of the entire financial system. They, specifically sovereign bonds, are THE asset class against which all risk is priced globally. This mess will take months if not years to unfold.

Junk bonds were first, emerging market corporates are next, then maybe municipal bonds and eventually sovereign bonds. By the time the smoke has cleared, stocks will be at levels below even the March 2009 lows.

Another stock market crash is coming. Smart investors are preparing now in anticipation.

If you’ve ye to take action to prepare yourself and your portfolio for the next round of the Crisis, we just published a 21-page investment report titled Stock Market Crash Survival Guide.

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

Wells Fargo Is Bad, But Citi Is Worse

Submitted by Tyler Durden on 01/17/2016 19:28 -0500
http://www.zerohedge.com/news/2016-01-17/wells-fargo-bad-citi-worse
Earlier we reported that Wells Fargo may have an energy problem because as CFO John Shrewsbury revealed, of the $17 billion in energy exposure, "most of it" was junk rated.
But, while one can speculate what the terminal cumulative losses, cumulative defaults and loss severities on this loan book will be, at least Wells was honest enough to reveal its energy-related loan loss estimate: it was $1.2 billion, or 7% of total - as Mike Mayo pointed out, one of the highest on the street. Whether it is high, or low, is anyone's guess, but at least Wells disclosed it.
Citi did not.
Yes, the bank did disclose its holdings to the oil and gas sector at $21 billion funded and $58 billion which included unfunded (watch that unfunded exposure collapsing and shrinking the available pool of shale company liquidity in the coming weeks), and it did announce that it "built roughly $300 million of energy-related loan loss reserves this quarter", but paradoxically one thing it did not disclose was its total reserves to energy.
Note the following perplexing exchange between analyst Mike Mayo and Citi CFO John Gerspach:

<Q - Mike Mayo>: Can we move to energy, though? I don't want you being the only bank not disclosing reserves to energy - oil and gas loans. I mean, I think most others have disclosed that who have reported so far. And I mean, your stock's down 7%. The whole market is down a whole lot, but I don't - even if it's a low number, it can't hurt too much more from here. And so can you - how much in oil and gas loans do you have, and what are the reserves taken against that? I know you were asked this already, but I'm going back for a second try.

<A - John C. Gerspach>: When you take a look at the overall portfolio, Mike, we've reduced the amount of exposure. Our funded exposure to energy-related companies this quarter is down 4%. It's about $20.5 billion. The overall exposure also came down about 4%. The overall exposure now is about $58 billion, that includes unfunded. When you take a look at the composition of the funded portfolio, about 68% of that portfolio would be investment grade. That's up from the 65% that we would have had at the end of the third quarter. And the unfunded book is about 87% investment grade. So while we are taking what we believe to be the appropriate reserves for that, I'm just not prepared to give you a specific number right now as far as the amount of reserves that we have on that particular book of business. That's just not something that we've traditionally done in the past.

And yet all other reporting banks have done it not only in the past, but this quarter as well.
One wonders just how much of Gerspach's decision was dictated by the Fed's under the table suggestion to avoid mark to market in energy entirely, and thus to stop marking its loan book. To be sure, without knowing the total amount of reserves to oil are, one simply can't do any calculations on Citi's total energy book, even if the once already bailed out bank so eagerly provided the incremental addition to this reserve. As if that number is in any way helpful.
Finally, we eagerly await for someone from the Dallas Fed to contact us and to comment on our article from yesterday that the "Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears." Because with megabanks such as Citi refusing to disclose energy losses, the longer the Fed remains mute on just what it knows that nobody else does, the more concerned the market will be that the subprime crisis is quietly playing out under its nose all over again.
But one thing is certain: the panic can begin in earnest when Janet Yellen says, at the next Fed press conference, that "energy is contained."

Wells Fargo's Problem Emerges: $17 Billion In Junk Energy Exposure

Submitted by Tyler Durden on 01/17/2016 18:37 -0500
http://www.zerohedge.com/news/2016-01-17/wells-fargos-problem-emerges-17-billion-junk-energy-exposure
When Wells Fargo reported its Q4 earnings last week, the one topic analysts and investors wanted much more clarity on, was the bank's exposure to oil and gas loans, and much more color on its energy book over concerns that Wells, like most of its peers, was underestimating the severity of the upcoming shale default wave.
And while the company's earnings call indeed reveals that things are deteriorating rapidly in Wells energy book, perhaps an even bigger concern for Wells investors, which just happens to be the largest US mortgage lender, should be what is going on with its mortgage book. The answer: nothing. In fact, at $64 billion in mortgage applications in the quarter, this was not only a major drop from Q3, but also the lowest since the first quarter of 2014.


Needless to say, without significant growth in Wells' mortgage pipeline and originations, there can be no upside to Wells Fargo stock, meanwhile one can kiss the so-called housing recovery goodbye for the final time, because now that the US Treasury is cracking down on criminal and money laundering "all cash" buyers, we fully expect the housing industry to grind to a near halt in the coming 2-3 quarters.
That covers the lack of upside. As for the substantial downside, here are the key parts from Wells Fargo's conference call discussing the bank's energy exposure.
First: how big is Wells' loan loss allowance for energy:

We've considered the challenges within the energy sector and our allowance process throughout 2015 and approximately $1.2 billion of the allowance was allocated to our oil and gas portfolio. It's important to note that the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

Then, from the Q&A, how much is Wells' total loan exposure, its fixed income and equity exposure toward energy:

I would use $17 billion as outstandings  for energy loans. And for securities, I would use, call it, $2.5 billion which is the sum of AFS securities and non-marketable securities.

In other words, a 7% loan loss reserve toward energy, perhaps the highest on all of Wall Street.
Then, here is the breakdown by services:

We're focused on the whole thing. Half of  those customers - half of those balances represent E&P companies, upstream companies. A quarter of them represent oilfield services companies, and a  quarter of them represent pipelines and storage and other midstream activity. And it excludes what I would describe as investment grade sort of diversified larger cap companies where we don't view the credit exposure as quite the same.

But the "downside risk" punchline was the following exchange with Mike Mayo:

<Q - Mike L. Mayo>: What percent of the $17 billion is not investment grade?

<A - John R. Shrewsberry>: I would say most of it. Most of it.

<Q - Mike L. Mayo>: So most of the $17 billion is non-investment grade.

<A - John R. Shrewsberry>: Correct.

To summarize: $17 billion in oil and energy exposure, which has a modest $1.2 billion, or 7%, loss reserve assigned to it (the highest on the street mind you), and which is made up "mostly" of junk bonds.
Why could the be concerning? Well, one reason is that junk yields just surpassed the all time highs set just after the Lehman bankruptcy.

In retrospect we can see why the Dallas Fed told banks to stop marking assets to market.
As for Wells, Warren Buffett may want to take another bath in the coming days.
Source: Wells Fargo Q4, 2015 Conference Call