Tracking Loans Through a Firm That Holds Millions
By MIKE McINTIRE www.nytimes.com 4/24/2009
Judge Walt Logan had seen enough. As a county judge in Florida, he had 28 cases pending in which an entity called MERS wanted to foreclose on homeowners even though it had never lent them any money.
MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.
“You don’t think that’s reasonable?” the judge asked.
“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”
Judge Logan had entered the murky realm of MERS. Although the average person has never heard of it, MERS — short for Mortgage Electronic Registration Systems — holds 60 million mortgages on American homes, through a legal maneuver that has saved banks more than $1 billion over the last decade but made life maddeningly difficult for some troubled homeowners.
Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.
If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods.
In Brooklyn, an elderly homeowner pursuing fraud claims had to go to court to learn the identity of the bank holding his mortgage note, which was concealed in the MERS system. In distressed neighborhoods of Atlanta, where MERS appeared as the most frequent filer of foreclosures, advocates wanting to engage lenders “face a challenge even finding someone with whom to begin the conversation,” according to a reportby NeighborWorks America, a community development group.
To a number of critics, MERS has served to cushion banks from the fallout of their reckless lending practices.
“I’m convinced that part of the scheme here is to exhaust the resources of consumers and their advocates,” said Marie McDonnell, a mortgage analyst in Orleans, Mass., who is a consultant for lawyers suing lenders. “This system removes transparency over what’s happening to these mortgage obligations and sows confusion, which can only benefit the banks.”
A recent visitor to the MERS offices in Reston, Va., found the receptionist answering a telephone call from a befuddled borrower: “I’m sorry, ma’am, we can’t help you with your loan.” MERS officials say they frequently get such calls, and they offer a phone line and Web page where homeowners can look up the actual servicer of their mortgage.
In an interview, the president of MERS, R. K. Arnold, said that his company had benefited not only banks, but also millions of borrowers who could not have obtained loans without the money-saving efficiencies it brought to the mortgage trade. He said that far from posing a hurdle for homeowners, MERS had helped reduce mortgage fraud and imposed order on a sprawling industry where, in the past, lenders might have gone out of business and left no contact information for borrowers seeking assistance.
“We’re not this big bad animal,” Mr. Arnold said. “This crisis that we’ve had in the mortgage business would have been a lot worse without MERS.”
About 3,000 financial services firms pay annual fees for access to MERS, which has 44 employees and is owned by two dozen of the nation’s largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie Mae, Freddie Mac and Ginnie Mae, the mortgage finance giants, who produced a white paper in 1993 on the need to modernize the trading of mortgages.
At the time, the secondary market was gaining momentum, and Wall Street banks and institutional investors were making millions of dollars from the creative bundling and reselling of loans. But unlike common stocks, whose ownership has traditionally been hidden, mortgage-backed securities are based on loans whose details were long available in public land records kept by county clerks, who collect fees for each filing. The “tyranny of these forms,” the white paper said, was costing the industry $164 million a year.
“Before MERS,” said John A. Courson, president of the Mortgage Bankers Association, “the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that becomes terribly debilitating.”
Although several courts have raised questions over the years about the secrecy afforded mortgage owners by MERS, the legality has ultimately been upheld. The issue has surfaced again because so many homeowners facing foreclosure are dealing with MERS.
Advocates for borrowers complain that the system’s secrecy makes it impossible to seek help from the unidentified investors who own their loans. Avi Shenkar, whose company, the GMA Modification Corporation in North Miami Beach, Fla., helps homeowners renegotiate mortgages, said loan servicers frequently argued that “investor guidelines” prevented them from modifying loan terms.
“But when you ask what those guidelines are, or who the investor is so you can talk to them directly, you can’t find out,” he said.
MERS has considered making information about secondary ownership of mortgages available to borrowers, Mr. Arnold said, but he expressed doubts that it would be useful. Banks appoint a servicer to manage individual mortgages so “investors are not in the business of dealing with borrowers,” he said. “It seems like anything that bypasses the servicer is counterproductive,” he added.
When foreclosures do occur, MERS becomes responsible for initiating them as the mortgage holder of record. But because MERS occupies that role in name only, the bank actually servicing the loan deputizes its employees to act for MERS and has its lawyers file foreclosures in the name of MERS.
The potential for confusion is multiplied when the high-tech MERS system collides with the paper-driven foreclosure process. Banks using MERS to consummate mortgage trades with “electronic handshakes” must later prove their legal standing to foreclose. But without the chain of title that MERS removed from the public record, banks sometimes recreate paper assignments long after the fact or try to replace mortgage notes lost in the securitization process.
This maneuvering has been attacked by judges, who say it reflects a cavalier attitude toward legal safeguards for property owners, and exploited by borrowers hoping to delay foreclosure. Judge Logan in Florida, among the first to raise questions about the role of MERS, stopped accepting MERS foreclosures in 2005 after his colloquy with the company lawyer. MERS appealed and won two years later, although it has asked banks not to foreclose in its name in Florida because of lingering concerns.
Last February, a State Supreme Court justice in Brooklyn, Arthur M. Schack, rejected a foreclosure based on a document in which a Bank of New York executive identified herself as a vice president of MERS. Calling her “a milliner’s delight by virtue of the number of hats she wears,” Judge Schack wondered if the banker was “engaged in a subterfuge.”
In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents, helping to delay foreclosure on the home of Darlene and Robert Blendheim, whose subprime lender went out of business and left a confusing paper trail.
“I had never heard of MERS until this happened,” Mrs. Blendheim said. “It became an issue with us, because the bank didn’t have the paperwork to prove they owned the mortgage and basically recreated what they needed.”
The avalanche of foreclosures — three million last year, up 81 percent from 2007 — has also caused unforeseen problems for the people who run MERS, who take obvious pride in their unheralded role as a fulcrum of the American mortgage industry.
In Delaware, MERS is facing a class-action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charged by banks that foreclose in MERS’s name.
Sometimes, banks have held title to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them, and has also created a registry to locate property managers responsible for foreclosed homes.
“But at the end of the day,” said Mr. Arnold, president of MERS, “if that lawn is not getting mowed and we cannot find the party who’s responsible for that, I have to get out there and mow that lawn.”
Saturday, April 25, 2009
Friday, April 24, 2009
Checking Obama's Balance
By Stephen Sestanovich, www.washingtonpost.com
Friday, April 24, 2009
Last week, 30 Columbia University graduate students and I spent two long days in meetings with senior officials at the State Department and National Security Council; on Capitol Hill; and with experienced Washington journalists, economists, consultants and lobbyists. Most of us probably expected to come away wondering whether, in its overhaul of American foreign policy, the Obama administration has found a winning strategy for dealing with tough problems such as Iran or North Korea. By the end my conclusion was different. What the president and his team really need is a strategy for dealing with Congress
Our field trip came three days after President Obama announced his refashioning of Cuba policy. Not surprisingly, my students asked why the changes were so limited, especially since -- as we were frequently told -- the administration believes the U.S. embargo has been "a total failure for decades." Ah, we heard, anything more far-reaching would require action by Congress.
The week before, in Prague, Obama had announced his vision of a world without nuclear weapons. As a crucial first step, he said he would "immediately and aggressively" seek ratification of the Comprehensive Nuclear Test Ban Treaty to bolster American credibility in trying to keep other states from going nuclear. But on the Hill we heard that the votes aren't there for ratification, that key senators who voted down the treaty 10 years ago may be even more dubious now. Pressed on this, administration officials conceded that "immediate" and "aggressive" action doesn't actually mean "soon" -- not this year, and maybe not in the first half of next year.
Perhaps no Obama policy has excited more enthusiasm abroad than the administration's readiness to negotiate a binding treaty on climate change. My students were reminded, however, that Congress intends to define the new standards that will restrict greenhouse-gas emissions, and the desire to maintain congressional control crosses party lines. Last month almost half of the Senate's Democrats voted to give their Republican colleagues more say in the process -- by agreeing to require a 60-vote supermajority on climate legislation.
The list of issues pitting the president against Congress could be extended. While in Europe, Obama promised Russian President Dmitry Medvedev to "graduate" Russia from the restrictions of the Jackson-Vanik amendment, the Cold War law that tied trade relations to free emigration from the Soviet Union. Although emigration has not been restricted for years, many senators believe that Jackson-Vanik should remain in place until the United States gets something in return -- trade concessions, perhaps, or gestures on human rights.
The budget that Defense Secretary Robert Gates introduced this month may face similar trouble. My students heard a senior official of the previous administration praise Gates for trying to focus the Pentagon on current counterinsurgency operations -- and away from the much smaller risk of war with another major power. But congressional committee chairmen are clearly less happy about the change. The old strategy meant more spending on big weapons systems -- and more manufacturing jobs in their districts.
Administration strategists understand all this, and they think that once they begin to make their case, issue by issue, they'll pick up more support. Surely they will. Even so, despite Democratic majorities in both houses, each issue on which Obama is seeking to change long-standing policy will be a tough battle. In no case -- not climate change, defense spending or even Cuba -- is existing policy held in place simply by Republican obstinacy. What the president really needs is more support than he can now count on from industrial-state Democrats. And on nuclear testing, not even unanimous Democratic support will be enough.
Treaty ratification requires a two-thirds majority, and the Comprehensive Nuclear Test Ban Treaty will go nowhere unless influential Republican senators support it. The administration's task is further complicated by the fact that, having called for change on so many issues, it can't treat them all as matters of hair-on-fire urgency. The president's floor managers and backroom dealmakers know they will have to resort to the logrolling that defines Congress's daily business. They are probably beginning to wonder whether, even with today's vast federal budget, there's enough pork to go around for all the votes they're going to have to buy.
But if the Obama administration ends up relying on a give-a-little-here, get-a-little-there strategy to move its foreign policy agenda through Congress, it will probably fail. New presidents who want to push for big changes usually conclude that they need more power to make them work. They challenge Congress to defy them by treating it as an out-of-date institution, slow in its ways, poorly adapted to new realities and overly influenced by parochial interests.
There is already a not-so-gentle hint of this approach in the administration's suggestion that if Congress can't reach consensus on sound climate policy, it will exercise its own regulatory authority to achieve the same result. It's not hard to imagine a more aggressive approach on other issues, particularly defense spending. (Richard Nixon, remember, called his defiance of the congressional budget process "sequestration" -- the Obama administration may simply need a fresher term.)
It would be ironic if Barack Obama, following a president whom he scorned for abusing executive power, concluded that he can't reorient foreign policy in the ways he wants without more unhampered authority. But deferring to Congress too often carries a high price. If the president really wants a new foreign policy, he won't want to pay it.
Friday, April 24, 2009
Last week, 30 Columbia University graduate students and I spent two long days in meetings with senior officials at the State Department and National Security Council; on Capitol Hill; and with experienced Washington journalists, economists, consultants and lobbyists. Most of us probably expected to come away wondering whether, in its overhaul of American foreign policy, the Obama administration has found a winning strategy for dealing with tough problems such as Iran or North Korea. By the end my conclusion was different. What the president and his team really need is a strategy for dealing with Congress
Our field trip came three days after President Obama announced his refashioning of Cuba policy. Not surprisingly, my students asked why the changes were so limited, especially since -- as we were frequently told -- the administration believes the U.S. embargo has been "a total failure for decades." Ah, we heard, anything more far-reaching would require action by Congress.
The week before, in Prague, Obama had announced his vision of a world without nuclear weapons. As a crucial first step, he said he would "immediately and aggressively" seek ratification of the Comprehensive Nuclear Test Ban Treaty to bolster American credibility in trying to keep other states from going nuclear. But on the Hill we heard that the votes aren't there for ratification, that key senators who voted down the treaty 10 years ago may be even more dubious now. Pressed on this, administration officials conceded that "immediate" and "aggressive" action doesn't actually mean "soon" -- not this year, and maybe not in the first half of next year.
Perhaps no Obama policy has excited more enthusiasm abroad than the administration's readiness to negotiate a binding treaty on climate change. My students were reminded, however, that Congress intends to define the new standards that will restrict greenhouse-gas emissions, and the desire to maintain congressional control crosses party lines. Last month almost half of the Senate's Democrats voted to give their Republican colleagues more say in the process -- by agreeing to require a 60-vote supermajority on climate legislation.
The list of issues pitting the president against Congress could be extended. While in Europe, Obama promised Russian President Dmitry Medvedev to "graduate" Russia from the restrictions of the Jackson-Vanik amendment, the Cold War law that tied trade relations to free emigration from the Soviet Union. Although emigration has not been restricted for years, many senators believe that Jackson-Vanik should remain in place until the United States gets something in return -- trade concessions, perhaps, or gestures on human rights.
The budget that Defense Secretary Robert Gates introduced this month may face similar trouble. My students heard a senior official of the previous administration praise Gates for trying to focus the Pentagon on current counterinsurgency operations -- and away from the much smaller risk of war with another major power. But congressional committee chairmen are clearly less happy about the change. The old strategy meant more spending on big weapons systems -- and more manufacturing jobs in their districts.
Administration strategists understand all this, and they think that once they begin to make their case, issue by issue, they'll pick up more support. Surely they will. Even so, despite Democratic majorities in both houses, each issue on which Obama is seeking to change long-standing policy will be a tough battle. In no case -- not climate change, defense spending or even Cuba -- is existing policy held in place simply by Republican obstinacy. What the president really needs is more support than he can now count on from industrial-state Democrats. And on nuclear testing, not even unanimous Democratic support will be enough.
Treaty ratification requires a two-thirds majority, and the Comprehensive Nuclear Test Ban Treaty will go nowhere unless influential Republican senators support it. The administration's task is further complicated by the fact that, having called for change on so many issues, it can't treat them all as matters of hair-on-fire urgency. The president's floor managers and backroom dealmakers know they will have to resort to the logrolling that defines Congress's daily business. They are probably beginning to wonder whether, even with today's vast federal budget, there's enough pork to go around for all the votes they're going to have to buy.
But if the Obama administration ends up relying on a give-a-little-here, get-a-little-there strategy to move its foreign policy agenda through Congress, it will probably fail. New presidents who want to push for big changes usually conclude that they need more power to make them work. They challenge Congress to defy them by treating it as an out-of-date institution, slow in its ways, poorly adapted to new realities and overly influenced by parochial interests.
There is already a not-so-gentle hint of this approach in the administration's suggestion that if Congress can't reach consensus on sound climate policy, it will exercise its own regulatory authority to achieve the same result. It's not hard to imagine a more aggressive approach on other issues, particularly defense spending. (Richard Nixon, remember, called his defiance of the congressional budget process "sequestration" -- the Obama administration may simply need a fresher term.)
It would be ironic if Barack Obama, following a president whom he scorned for abusing executive power, concluded that he can't reorient foreign policy in the ways he wants without more unhampered authority. But deferring to Congress too often carries a high price. If the president really wants a new foreign policy, he won't want to pay it.
Thursday, April 16, 2009
Wells Fargo’s "Profit": Too Good to Be True
Commentary by Jonathan Weil
April 16 (Bloomberg) -- Wells Fargo & Co. stunned the world last week by proclaiming it had just finished its most profitable quarter ever. This will go down as the moment when lots of investors decided it was safe again to place blind faith in a big bank’s earnings.
What sent Wells shares soaring on April 9 was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.
Dig below the surface of Wells’s numbers, though, and there are reasons to be wary. Here are four gimmicks to look out for when the company releases its first-quarter results on April 22:
Gimmick No. 1: Cookie-jar reserves.
Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books -- the effect of which I’ll explain in a moment.
First, a quick tutorial: Loan-loss allowances are the reserves lenders set up on their balance sheets in anticipation of future credit losses. The expenses that lenders record to boost their loan-loss allowances are called provisions. As loans are written off, lenders record charge-offs, reducing their allowance.
Free to Dip
Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.)
The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income.
Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.
Small Losses
All this may help explain Wells’s surprisingly small loan losses. For the first quarter, Wells said net charge-offs were $3.3 billion, compared with $6.1 billion at Wells and Wachovia combined for the fourth quarter. Provisions were $4.6 billion, bringing Wells’s allowance to $23 billion, as of March 31.
Wells, which completed its purchase of Wachovia on Dec. 31, wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.
Gimmick No. 2: Cooked capital.
The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.
Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure. Nor could I figure out from the disclosures in Wells’s annual report how it got a number so high.
Shouldn’t Be Guessing
Investors shouldn’t have to guess. Under a Securities and Exchange Commission rule called Regulation G, companies that release non-GAAP financial measures are required to disclose “a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure.” (The rule applies to press releases, as well as formal SEC filings.) That way, anyone can see how the numbers were calculated.
Wells didn’t do this in its March 6 release. A spokeswoman, Julia Tunis Bernard, declined to tell me the math Wells used. Silly me -- I thought the SEC’s rules apply to Wells Fargo, too.
Gimmick No. 3: Otherworldly assets.
Look at Wells’s Dec. 31 balance sheet, and you’ll see a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.
The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard.
Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.
Gimmick No. 4: Buried losses.
How quickly investors forget. One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income.
Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.
The bottom line: Net income isn’t necessarily income. And it means nothing without complete financial statements.
Investors should have learned this lesson by now.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
April 16 (Bloomberg) -- Wells Fargo & Co. stunned the world last week by proclaiming it had just finished its most profitable quarter ever. This will go down as the moment when lots of investors decided it was safe again to place blind faith in a big bank’s earnings.
What sent Wells shares soaring on April 9 was a three-page press release in which the San Francisco-based bank said it expected to report first-quarter net income of about $3 billion. Wells disclosed few details of what was in that figure. And by pushing the stock up 32 percent that day to $19.61, investors sent a clear message: They didn’t care.
Dig below the surface of Wells’s numbers, though, and there are reasons to be wary. Here are four gimmicks to look out for when the company releases its first-quarter results on April 22:
Gimmick No. 1: Cookie-jar reserves.
Wells’s earnings may have gotten a boost from an accounting maneuver, since banned, that it used last year as part of its $12.5 billion purchase of Wachovia Corp. Specifically, Wells carried over a $7.5 billion loan-loss allowance from Wachovia’s balance sheet onto its own books -- the effect of which I’ll explain in a moment.
First, a quick tutorial: Loan-loss allowances are the reserves lenders set up on their balance sheets in anticipation of future credit losses. The expenses that lenders record to boost their loan-loss allowances are called provisions. As loans are written off, lenders record charge-offs, reducing their allowance.
Free to Dip
Once it took control of the reserve from Wachovia, Wells was free to start dipping into it to absorb new credit losses on all sorts of loans, including loans Wells had originated itself. (Think of a child raiding a cookie jar.)
The upshot is that Wells could get by with reduced provisions until the $7.5 billion is used up, boosting net income.
Another quirk: The reserve was related to $352.2 billion of Wachovia loans for which Wells was not forecasting any future credit losses, according to Wells’s annual report.
Small Losses
All this may help explain Wells’s surprisingly small loan losses. For the first quarter, Wells said net charge-offs were $3.3 billion, compared with $6.1 billion at Wells and Wachovia combined for the fourth quarter. Provisions were $4.6 billion, bringing Wells’s allowance to $23 billion, as of March 31.
Wells, which completed its purchase of Wachovia on Dec. 31, wouldn’t have been allowed to carry over the allowance had it completed the acquisition a day later. On Jan. 1, new rules by the Financial Accounting Standards Board took effect prohibiting such transfers. A Wells spokeswoman, Janis Smith, declined to comment.
Gimmick No. 2: Cooked capital.
The most closely watched measure of a bank’s capital these days is a bare-bones metric called tangible common equity. While the term doesn’t have a standardized definition under generally accepted accounting principles, it typically means a company’s shareholder equity, excluding preferred stock and intangible assets, such as goodwill leftover from past acquisitions.
Measured this way, Wells had $13.5 billion of tangible common equity as of Dec. 31, or 1.1 percent of tangible assets. Yet in a March 6 press release, Wells said its year-end tangible common equity was $36 billion. Wells didn’t say how it arrived at that figure. Nor could I figure out from the disclosures in Wells’s annual report how it got a number so high.
Shouldn’t Be Guessing
Investors shouldn’t have to guess. Under a Securities and Exchange Commission rule called Regulation G, companies that release non-GAAP financial measures are required to disclose “a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure.” (The rule applies to press releases, as well as formal SEC filings.) That way, anyone can see how the numbers were calculated.
Wells didn’t do this in its March 6 release. A spokeswoman, Julia Tunis Bernard, declined to tell me the math Wells used. Silly me -- I thought the SEC’s rules apply to Wells Fargo, too.
Gimmick No. 3: Otherworldly assets.
Look at Wells’s Dec. 31 balance sheet, and you’ll see a $109.8 billion line item called “other assets.” What’s in that number? For that breakdown, you need to go to a footnote in Wells’s financial statements. And here’s where it gets comical.
The footnote says the largest component was a $44.2 billion bucket that Wells labeled as “other.” Yes, that’s right: The biggest portion of “other assets” was “other.” And what did this include? The disclosure didn’t say. Neither would Bernard.
Talk about a black box. That $44.2 billion is more than Wells’s tangible common equity, even using the bank’s dodgy number. And we don’t have a clue what’s in there.
Gimmick No. 4: Buried losses.
How quickly investors forget. One week before Wells’s earnings news, the FASB caved to pressure by the banking industry and passed new rules that let companies ignore large, long-term losses on the debt securities they own when reporting net income.
Wells didn’t say what its first-quarter earnings would have been without the rule change, which companies can apply to their latest quarterly results. As of Dec. 31, though, Wells had $12.2 billion of gross losses on securities held for sale that weren’t included in earnings. Of those, $4.2 billion were on securities that had been worth less than their cost for more than a year.
The bottom line: Net income isn’t necessarily income. And it means nothing without complete financial statements.
Investors should have learned this lesson by now.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net
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