Friday, April 10, 2009

Wells Fargo being deceptive about their earnings?

Business: My first thought was if you get $25 billion in taxpayer money, you better show some sort of profit, but given the state of the economy it didn't sound right.

Wells Fargo, which has received $25 billion from the federal government, said that its traditional and investment banking businesses grew and that the results in its mortgage business were "exceptionally strong."

The company said it put $4.6 billion away to cover losses, less than many analysts expected. It also said Wachovia, a large Charlotte bank that Wells Fargo bought last fall, was contributing more in sales and profit than expected to the combined company's bottom line.

As a result, the company said its earnings would be more than twice what a consensus of analysts surveyed by Bloomberg had anticipated.

But some analysts were skeptical of the unexpectedly big boost in earnings. Analysts at Arlington investment bank FBR Capital Markets asked in a research report yesterday whether Wells Fargo benefited from recent changes in mark-to-market accounting rules. Banks now can value troubled assets at a higher price than the market is willing to pay. A spokeswoman for Wells Fargo declined to say.

The FBR analysts also doubted that Wells Fargo was accurately assessing its losses on loans. "We believe that credit quality materially deteriorated in the first quarter and that Wells Fargo is under-reserving for expected future losses," the analysts wrote.

Christopher Whalen, managing director of Institutional Risk Analytics, questioned how Wells Fargo could have a slower rate of defaults, or charge-offs, this year than last, given the worsening state of the economy.

"I just don't think that, where we are in the credit cycle, it's credible for a bank with their portfolio composition to tell me their charge-off rate fell," he said.

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