Thursday, April 9, 2009

Wells Fargo’s accounting trick!

Wells Fargo’s pre-announcement may come by complete surprise for many savvy investors ,but when you go deep in details, you will find out that the accounting tricks play very important rolls in Wells Fargo’s earning. Well's CFO has denied any effect of relaxation of the Mark-to-market accounting rolls on their balance sheets! I would say give me a break.

There are many unknown when we dealing with banks balance sheets, for example We don’t know anything about non-performing assets* or commercial real estate of WFC. Wells Fargo wants to show to Washington it can make it on its own without federal assistance!

If we imagine Fed efforts to assist the housing market by making more affordable mortgages available and encouraging refinancing are working as Bernanke dreams, which in reality they don’t; still isn't going to stop banks from experiencing higher credit costs ,nor those home owners who their houses have lost over 40% of it’s value are going to benefit from Fed actions. The WFC will likely see rising loan delinquencies and defaults through 2009-2011, especially with unemployment on the rise and consumer spending declines.

Wells' CFO dodged the question when he was asked by Bloomberg’s reporter about non-performing assets, commercial real estate and corporate loan exposures, three potential flash points as the recession continues to take its toll. He did say combined net charge-offs would be $3.3 billion in the quarter, down from $6.1 billion in the fourth quarter after combining results from legacy WFC and Wachovia.
Well’s CFO said they had $190 billion in mortgage applications for over 800,000 homeowners in the first-Q, up 64% from the fourth-Q, including $83 billion applications in March. but he did not say how many of those applications were for refinancing!!!

WFC daily chart 07/2008 to 04/2009

It is fascinating to me when Wells, and other insolvent banks, claimed to repay the TARP money as soon as possible!!!! Question is how WFC, BAC,C and others can raise private capital when the private sector cannot trust their balance sheets ?
The recent change in accounting rolls by FASB from Mark-to-market to mark-to-fantasy will stop them to sell their asset through PP-IP (Public-Private Investment Program) and make impossible for investors to trust their fictitious earnings. Earnings would only drive up valuations if they are generated by ongoing business and not accounting tricks and fictitious balance sheets. Due to relaxation of Mark-to-market accounting rolls we are going to get many more fictitious earnings from banking sector with in next couple weeks . So next time don't get surprise if you heard City group bit the analysts expectations by 200% ! (;

* (Definition, Non-performing assets: Non-performing asset could be a loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income.)