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?
TIME magazine has called it over – thanks for coming, everyone, and please watch your step as you disembark the ride. In an article titled “More quickly than it began, the banking crisis is over,” the intrepid financial analysts at TIME lay out their argument:
But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.
When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup (C) and Bank of America (BAC). The initial TARP may also have provided time for the new Administration to put together its widely hailed bank “stress test” program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.
All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo (WFC) indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success. Wells Fargo (WFC) said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required.
There you have it. The bailout, TARP, TALF, the guaranteed balance sheets: all massive successes! So too were the stress tests and PPIP which have not even started. The authors are careful to cover themselves in the (highly likely) case they are wrong, noting that “The banking crisis may be over, but what is left is a reclamation job that will probably take years to complete,” and leaving the door conveniently open for an article on what will presumably be known as the second banking crisis, now that the first is behind us.
It’s also interesting to note that one of their indicators is that Citigroup traded below $1 (“in the pennies” as they put it). It is left to the reader’s imagination why the $1 mark is of any significance for calling a bottom. Most likely, they simply regard it as the lowest point the stock has reached, followed by a rapid multiple-times gain. By the same logic, Bear Stearns represented the end of a previous banking crisis (the Nothingth?) shortly before JPM put the storied firm out of its misery.