Wells Fargo Earnings?

U.S. debt and deficits are running over $1 trillion per annum and amount to over 700% of Federal revenue.  And just last week, we learned that the monthly budget deficit climbed to $85.97 billion in December, from $78.13 billion in the same month a year earlier.  The only relief from such debt will be a default on the part of the United States.  A sovereign U.S. default would be pernicious for the dollar and massively bullish for gold.  - Michael Pento, on King World News

I see Wells Fargo's earnings report was greeted by much fanfare by Bubblevision and the mass media slavishly followed by the hoi polloi.  I was curious to see if I could figure out where Warren Buffet was fudging the truth about WFC's earnings, so I took a quick peek at the 8-K filed with the SEC this morning.

Let me qualify this by saying that I only looked in the obvious spots - of course ignoring the fancy marketing charts and spin data attached to the 8-K - to see where I could deflate WFC's inflated earnings report.  I don't have time to go through WFC's numbers with a fine tooth comb, but just looking at the hot spots of GAAP manipulation will show you why WFC stock makes a better short than long.

First, versus 2010, WFC reduced its allowance for credit losses from $23.6 billion in 2010 to $19.6 billion in 2011.  If they had just kept that number the same, WFC would have reported break-even results for 2011 - i.e. no net income.

Here's why I believe that a scrutinizing analyst should look at WFC's earnings report but use the same allowance for loan losses as in 2010:  WFC actually increased the number of loans 90 days or more past due to $22 billion, from $18.5 billion in 2010.  That's a 19% increase in non-paying loans (mostly mortgages).  We also know that these banks are letting a significant portion of their delinquent mortgages "slide," without classifying them as delinquent or in default.  So assume that WFC's number is actually larger than $22 billion.  On that basis alone WFC's allowance for losses should have been closer to the $23 billion reported in 2010 than the $19 billion they reported this year

Furthermore, WFC has $37 billion in underwater "pick a pay" mortgages.  These are the notorious "pay option ARM's" that allow the borrow to skip payments and that payment is then added on to the outstanding loan balance.  These mortgages get bigger while the underlying housing collateral continues to shrink.  Most of Well's pick a pays are in California and Florida.  I think you can see that these mortgages will eventually be a big source of losses for WFC and WFC should therefore be reserving for losses associated with these mortgages at a faster rate, not a slower rate.

Even uglier, WFC as $106 billion in home equity loans.  35% of these are in Californian and Florida.  When a 1st mortgage is, best case, just barely covered by the value of the underlying home, it means the home equity debt attached to that home is worth ZERO.  If Warren and WFC were to be honest with the market and investors, the value of that home equity portfolio would be written down by at least 50%.  That's $56 billion in losses.  But since "new" GAAP and the "new FASB" allows these banks to hope and pray for a housing market miracle, lenders like WFC get to kick the can down the road and pretend that their home equity portfolio is really worth $106 billion.  Anyone want to take Wells' side of that bet?

My point here is that Wells should be much more aggressive in recognizing allowances for credit losses.  But since our ponzi system allows them to report b.s., it's b.s. we get when these banks reports earnings.  Needless to say eventually Warren will call up his good buddy Barack Obama and see to it that the taxpayer gets the tab for the eventual mortgage bloodbath on WFC's balance sheet.  But in the meantime, please understand that the earnings reported by Wells Fargo today were total bullshit.

Here's a link the 8-K if you would like to do your own research:  LINK

And bear in mind, I only had time to look at obvious areas of GAAP manipulation.  I'm sure if you combine today's filing with the 10-K and look at the off-balance mess in the footnotes, you will conclude the Wells probably should have reported an accounting loss.