Wells Fargo 'Profit' - People Have Short Memories 30 comments
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"Wells Fargo projects record $3 billion 1Q profit" - or have investors forgotten about the $25 billion bailout the bank received? Not that it mattered; markets have taken this as a positive and pushed an early 3% gain. WFC gapped well over resistance and although down from its open is nicely positioned to challenge $21.45 resistance. 
Ignoring the 66% of Nasdaq stocks trading above their 50-day MA, which suggests an intermediate top marking a 3-6 month high is imminent (bear market tops typically occur when 60% or more of stocks trade above this average), there is a nice play at work in the semiconductor ETF. The past 4 months of consolidation looks to be history and there should be good demand on any drop below $19.30. Next resistance around $21.10. I've made a whimsical call for a push to resistance with a stop below $19.30.
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Write downs were in the range of $3 Billion this quarter instead of $6 Billion in the previous quarter. Had the rules not changed the number may have been higher that $6 Billion. That would have wiped out their profits for the entire quarter. But since profits were not wiped out, there was very little impact on results.
Also, WF probably received payments from AIG, as did other major U.S. banks, in the unwinding of CDOs by AIG. Those payments would have included significant profits that would have boosted earnings, possibly in the $ Billions. Those results will undoubtedly be lumped in with other operating results so as to appear as ongoing. Take those profits out and we may have a loss.
Add the lower write downs and subtract the one-time profits from AIG transactions and you'll get the real operating results.
WF and other banks are all going to report profits and surprise to the upside, boost their stock prices, then do secondary offerings to raise additional capital. After that the Treasury will report aggregated findings from the stress tests so that we can't tell which banks are healthy and which ones are not. Then WF and others will accept additional capital infusions from Treasury.
After that, the big banks will "invest" in the PPIP funds using their toxic assets (FDIC head has indicated that she would consider this option), sell their toxic assets to the PPIF at above market rates because their own PPIF will bid up the price using government money. They will pocket the proceeds and let the PPIF fail.
This is called recapitalizing our financial institutions. It's really a transfer of wealth - from the poor and middle class back to the wealthy. We won't get the bill for all this until about 2011 or so. But the installments will go on forever.
I guess all is well in the Land of Oz....
Mark-to-market - massive losses
Mark-to-discounted PV of estimated cash flows - massive gains
Investors meanwhile, have no idea what their companies are worth. Even the professional analysts were totally off on their WFC estimates. These companies are making cash flow hand over fist but reporting massive and unpredictable income losses from investment write-downs.
This demonstrates the fallacy of combining investment banking and commercial banking. I say reinstate the Glass-Steagal act of 1933 (foolishly repealed in 1999) and make investment banks mark-to-market and commercial banks mark-to-PV. It's simple, elegant, and reflects a 60+ year history of banking stability. The consequences of combining these incompatible business models has already happened twice (so far): 1929 and 2008.
On Apr 09 02:27 PM Larrysyr wrote:
> If a change in accounting rules results in a change in reported profits
> which results in a change in market value, yet the underlying institution
> hasn't changed, haven't we conclusively disproved the efficient market
> hypothesis?
WFC is making a huge number of new loan originations, and booking the profits this quarter. However, the 4.5% they are getting on home mortgages is a huge interest-rate risk - the Fed has committed to running the printing presses, and the fiscal behavior of the federal gov suggests a return to reasonable (if not high) inflation in the future. Home loan rates are bound to return to long term average of 7% (if not higher if the $ printing gets out of hand) well before the 30 year fixed loans mature, causing large losses for WFC if they hold these loans. In short, the movement of WFC is over-exuberance, again, and I'd be looking for a snap-back to reality once the next quarter results aren't the same home-run as these.
On Apr 09 02:27 PM Larrysyr wrote:
> If a change in accounting rules results in a change in reported profits
> which results in a change in market value, yet the underlying institution
> hasn't changed, haven't we conclusively disproved the efficient market
> hypothesis?
... and this is the solution to the problem of over-leveraged banks?
(sigh.....)
Can someone explain to me why Ken Lewis, Steve Forbes, Hank Greenburg, etc. keep saying its unfair to force them to M2M their assets when by holding them to maturity, they would be worth more than what they are currently marked? If they fully intend on holding them to maturity, then why in bloody hell arent they classifying them as such and recording them at amortized cost?? Am I missing something??
I'm really at a loss as to why this is and cannot seem to get a straight answer from anybody.
I can only hope you participate by refinancing yourself. That way you can benefit from the inflation wave in 2011+. I just closed a 30-year at 4.375% and expect that low rate to pay handsome dividends in the future.
On Apr 09 02:31 PM betweenthenumbers wrote:
> National housing prices slid again (significantly) in Q109, so clearly
> any MBS should have been marked down again. However, they had already
> been not taking appropriate marks on them, so the suspension of MtM
> didn't show the benefit that one would expect had they been marking
> the assets down to true market value and not some pollyanna model
> when no one 30% under-water would defaults. As HuskerMark points
> out, many of the profits will turn out to be one-time events, plus
> many of the impairments will get pushed forward until they can see
> that their cash-flow models are false as well.
>
> WFC is making a huge number of new loan originations, and booking
> the profits this quarter. However, the 4.5% they are getting on home
> mortgages is a huge interest-rate risk - the Fed has committed to
> running the printing presses, and the fiscal behavior of the federal
> gov suggests a return to reasonable (if not high) inflation in the
> future. Home loan rates are bound to return to long term average
> of 7% (if not higher if the $ printing gets out of hand) well before
> the 30 year fixed loans mature, causing large losses for WFC if they
> hold these loans. In short, the movement of WFC is over-exuberance,
> again, and I'd be looking for a snap-back to reality once the next
> quarter results aren't the same home-run as these.
On Apr 09 12:40 PM Husker Mark wrote:
> According to the Wells Fargo report, the change in MTM accounting
> rules had very little effect on their 1st Qtr results. Let me interpret
> what that means: WF did not have to take the write downs on assets
> that they otherwise would have and so the effect was minimal. <br/>
>
> Write downs were in the range of $3 Billion this quarter instead
> of $6 Billion in the previous quarter. Had the rules not changed
> the number may have been higher that $6 Billion. That would have
> wiped out their profits for the entire quarter. But since profits
> were not wiped out, there was very little impact on results.
>
> Also, WF probably received payments from AIG, as did other major
> U.S. banks, in the unwinding of CDOs by AIG. Those payments would
> have included significant profits that would have boosted earnings,
> possibly in the $ Billions. Those results will undoubtedly be lumped
> in with other operating results so as to appear as ongoing. Take
> those profits out and we may have a loss.
>
> Add the lower write downs and subtract the one-time profits from
> AIG transactions and you'll get the real operating results.
>
> WF and other banks are all going to report profits and surprise to
> the upside, boost their stock prices, then do secondary offerings
> to raise additional capital. After that the Treasury will report
> aggregated findings from the stress tests so that we can't tell which
> banks are healthy and which ones are not. Then WF and others will
> accept additional capital infusions from Treasury.
>
> After that, the big banks will "invest" in the PPIP funds using their
> toxic assets (FDIC head has indicated that she would consider this
> option), sell their toxic assets to the PPIF at above market rates
> because their own PPIF will bid up the price using government money.
> They will pocket the proceeds and let the PPIF fail.
>
> This is called recapitalizing our financial institutions. It's really
> a transfer of wealth - from the poor and middle class back to the
> wealthy. We won't get the bill for all this until about 2011 or so.
> But the installments will go on forever.
ie. As the rate goes back towards 7%, won't the value of the home go down and not up?
On Apr 09 06:33 PM drbob66 wrote:
> Sounds like a lot of people here on SA missed the +30% move in WFC
> today.
>