Record Bank Earnings Require Creative Accounting

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First Wells Fargo, then Goldman. Now, Chase. All three are reporting healthy profits. Record sales. That kind of thing. Yet the economy isn’t picking up. What gives?

There’s something decidedly fishy about banks reporting record numbers after the government sucks off their toxic gunk. Not that the balance sheets aren’t real, they’re just…creative. Bloomberg’s Jonathan Weil describes how a combination of opaque bookkeeping and rapidly changing government regulations allowed Wells Fargo to report sky-high earnings earlier this month. I gather Wells’ case is akin to how Goldman and JP Morgan Chase explain their success:

1. 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…this may help explain Wells’s surprisingly small loan losses. For the first quarter, Wells said net charge-offs were $3.3 billion, compared with $6.1 billion at Wells and Wachovia combined for the fourth quarter.

2. 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.

3. 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. 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.

4. 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.

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  • interesting blog, bookmarked for the future referrence, what template do you use ?