Kinabalu

Financial-Dip Buyers Forget To Ask What's Next

This is the third article I've seen claiming that Wells Fargo beat the Street profit numbers by accounting trickery. How can people get jobs or claim to be proficient in finance without any knowledge of accounting? What Wells Fargo did they described as deferring chargeoffs from 120 to 180 days. As spotO notes above this does not increase net earnings. The entry for posting a chargeoff is very simple. 1) debit Loan Loss Reserve (a credit balance account); 2) credit Loan Asset . Thats it. Both of these accounts are balance sheet accounts. There is no income statement effect. What you end up with if you defer this entry is a higher LLR, which is appropriate because you still have the nonperforming asset on your books. To call this moving the goalposts is ridiculous. It is changing the rules but it is not creating income or capital by trickery.

A sophiscated analyst will look at something like the ratio of LLR to Nonperforming Loans. In Wells Fargo's case, because their ratio is greater than 1, the change actually makes this ratio look worse. For Wachovia or Washington Mutual, whose ratios are 84% and 87% respectively, this type of change would be more properly criticized, because it would have improved this widely reviewed ratio.