Sunday, April 19, 2009

Wells Farce-Co?


At the beginning of last week I made a post about how Wells Fargo Bank had stunned the world by proclaiming it had just finished its most profitable quarter ever. Stock market investors jumped on the news with blind faith and the bank's stock soared. What sent Wells shares soaring was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.

As I said, we will watch the Fargo situation unfold with interest as questions were being raised about the Banks optimistic appraisal of it's financial situation.

On April 22nd the company will be releasing its first-quarter results and the flurry of speculation is intensifying.

We already talked about how Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books.

Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself.

It appears to be a very deceiving slight of hand. Had Wells completed its purchase of Wachovia on Dec. 31, it wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.

As if that were not enough, other interesting tidbits are now coming out.

The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.

Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure.

Even more disturbing is Wells’s Dec. 31 balance sheet. On it is a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.

The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say.

That $44.2 billion is more than Wells’s tangible common equity, and no one knows what it is comprised of.

The more information that comes out, the more disconcerting the stability of the bank appears.

Watch for Fargo stock to drop like a rock when complete financial statements come out.

And with it could go investor confidence in the latest market rally.



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