Wells Fargo Leaves Much Uncertainty in Wake of Latest Earnings

The initial press release for 2Q sounded great. It was only when you read the 10K filing that you saw that Wells Fargo (WFC) Financial (the consumer credit arm for near prime and subprime) suffered losses and they are getting out of the auto leasing game altogether because "the returns are unacceptable" which means they barely broke even.

The CEO states that they are going to keep lending money to their existing credit-worthy customers, which is banker talk for "we don't know who we can trust so we aren't taking any chances with new customers." Besides the fact that it's completely contrary to growth, the prime customers who enjoy the benefits of the Wealth Management, Mortgage and Retail banking are only one illness, job loss, or death in the family into slipping into the WFF division, where they will be treated like redheaded stepchildren.

WFC reported earnings of $1.8 billion on revenue of almost $12 billion and in the last paragraph of "Non-Interest Income", they breezily state, almost in passing, that they posted a $2.1 billion unrealized loss in securities, and that most of the losses came from higher yield spreads in mortgage-backed securities.

So is this loss from CMOs? Or some other instrument which is rotting away in a clearinghouse? How did they arrive at the $2.1 billion figure? Was it marked to market? If these are auction rate securities, and there is no more market, is it marked to model? Are these valuations coming with the assumption that these securities will be sold sometime? If they aren't, are they just waiting for a better quarter to quietly slip them in as "realized" when they "realize" no one will buy them? The 10Q does not address any of these issues.

If the nation's fifth largest bank, with one of the most conservative lending models, can't come clean with their "unrealized losses," then investors' dreams of profiting from the stock will remain unrealized.

Disclosure: Long SKF

Comments

[fatcat:]

I can't agree more...I think these bankers learned a lot from making liar loans..think liar Q reports..

2008 Jul 18 07:48 AM

[firstmethod70:]

Good article... until you read the disclosure: long SKF. Looking up SKF reveals... Proshares Ultrashort Financials. So now the article might be better titled "Bitter short gets fried alive in recent $7 WFC runup". So much for objectivity.

2008 Jul 18 09:19 AM

[Lilguy:]

I have no interest in financials--long, short, or sideways--and I think that Mr. Lathrop makes an important point: The banks are finding increasingly glib ways to mask their ever-growing bad debts.

If memory serves, WFC changed its standard for non-performing mortgages from 120 days to 180 days of non-payment for this quarterly report. It cuts the writedowns for the moment, but what a colossal writedown they'll have to report next quarter--unless they find another cute accounting trick to hide reality.

They are really putting lipstick on the pig. I can't wait to hear what cute ideas C used to reduce its writedowns and losses below analysts' expectations. Ultimately, the lies will all come home to roost.

2008 Jul 18 09:55 AM

[ignorant:]

There is a common misconception in the market that the change in non-performing loans from 120 to180 days distorted earnings. The impact of this change is $265 million and WFC included the hit to earnings for the 120 day period. WFC did not write-off ( charge-off) the $265 against the balance sheet reserve but this has no impact on earnings. When the $265 million is charged off it will hit the reserve (not earnings). This is explained in the earnings release.

If the author is interested in what type of mortgage backed securiities have unrealized losses why doesn't he ask WFC.

2008 Jul 18 11:06 AM

[User 208427:]

As for getting out of the leasing business, it is not that they were "barely breaking even"...they were not meeting their internal hurdle rate for ROIC.

2008 Jul 18 11:45 AM