Jonathon Weil had a great article on Bloomberg regarding the recent quarterly reports at Wells Fargo. Weil did some excellent sleuthing and found even more holes in the balance sheet than I noticed:
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
Look at Wells’s Dec. 31 balance sheet, and you’ll see 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. Neither would Bernard.
Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.
How quickly investors forget. One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income.
Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.
The bottom line: Net income isn’t necessarily income. And it means nothing without complete financial statements.
Investors should have learned this lesson by now.
Citi and GE report tomorrow. We should see more of the same old same old. “Better than expected” earnings and more chatter about a market “bottom”. The beat goes on. The government controls this market. And while fighting the Fed hasn’t necessarily been a bad move during this bear market its quite certain that you can’t fight the entire U.S. government….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Well this is to be expected. What about JPM today? Less earnings but a higher profit? Maybe because they are able to pretend there are no write downs…
The real problem with JPM’s figures wasn’t the accounting change, but the sustainability of their earnings. Like Goldman, they had huge jumps in fixed income trading and I Banking. The government thinks the banks can earn their way out of this crisis. Japan’s banks thought the same thing….
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