Batter up: WFC

April 22, 2009 in Finance,News

The newest sideshow in the circus that is the banks' 1Q earnings is Wells Fargo, who most recently was spotted igniting a strong rally with the early announcement that earnings would not only beat the expected number of $0.39/share, but knock it out of the park, guiding expectations to $0.55/share.

Today the number came in right on the money (pun very much intended): a $3.05B profit or $0.56/share.

But the difference between previewing your earnings and releasing your earnings is that in the latter case you actually have to divulge what contributed to your bottom line.  And in this case, the answer is not much.

Buried within WFC's footnotes to the income statement is the following paragraph relating to other comprehensive income:

As a result of adopting FSP FAS 157-4, we recorded in this quarter a $4.4 billion reduction ($2.8 billion after tax) to our unrealized securities losses in other comprehensive income.

The comments to the release elaborated in the notes on non-interest income:

The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.

In other words, WFC stopped marking their securities to market, which conveniently resulted in a gain of more than $4B, or 94% of their pre-tax income. This begs the question: if a security is "available for sale" but no one is around to buy at it your arbitrary price, does it make a sound?

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