The Truth Comes Out

The rally in financial stocks that began last week is not yet over, but it is definitely struggling to maintain momentum. Aside from the SEC’s mysterious decision to crack down on “naked shorting,” the sector was the beneficiary of good quarterly reports from some large banks like Wells Fargo (WFC). OK, it wasn’t technically “good” news. But the loss at WFC it was not quite as bad as everyone expected. By Wall Street logic, that makes it good news.

Now it emerges that even by this standard, the news was not as good as initially thought. According to the Wall Street Journal, Wells Fargo cooked the books. Nothing illegal, of course, but it sure stinks. Here’s what they did: Wells Fargo used to “charge off” bad loans from its earnings when they were 120 days delinquent. Now they have decided to wait 180 days before letting bad loans show up on the bottom line. It sounds like a little thing, but for a huge bank like Wells Fargo little things add up to big things.

We hope whoever had this idea gets a nice bonus; with nothing but a few keystrokes he added $265 million to WFC’s quarterly earnings. Of course, the loss will return in later quarters. Reality hasn’t changed. Those loans are still bad, and nothing the accountants can do will change the facts.

If Wells Fargo is doing this sort of thing, you can bet others are, too. Banks naturally have hugely complicated financial statements, and there are all kinds of little “adjustments” that can make a big difference… for a little while. Eventually the truth comes out.