Anyone who understands that statistics, surveys, polls, and other data-gathering mechanisms and reports can be made to say whatever the presenter or receiver of them wants or interprets, you will know that release of the third-quarter results by Wells Fargo (NYSE:WFC) recently are devastating to the hoax that the recession is over and recovery has began.
While I’ve been underwhelmed by all the headlines announcing the record profits by some of the quarterly banking reports this week, the report from Wells Fargo underscores the faux numbers being presented as great news for the global and American economy, along with Wall Street.
Why do I say faux numbers? Now not only does the data offered in quarterly reports offer the ability to pick and choose how to interpret it to present the best side of the numbers for the company, but shadow accounting can allow omissions of huge numbers of loan losses (in the case of banks) without it affecting the perceived performance of the company.
For example, with Wells Fargo, it reported record profits, which were primarily based on fees related to refinancing loans, not from increasing or growing the business.
Worse, the company is simply keeping billions in loans they’re no longer collecting payments on off the books by not foreclosing on them. When a financial institution forecloses on a house, it is a reportable accounting event that goes against its profits and losses. The simples solution? Don’t foreclose and keep the houses empty to make your profits and future look much more healthy than it is in fact really is.
What is odd about this to me is the silence from Warren Buffett, who has built his reputation and success based upon the ability to identify shenanigans with companies and plow through their rhetoric and numbers to get to the truth behind them all. For him to quietly stand by while Wells Fargo does what he has asserted through the years he abhors, marks a major change in his behavior patterns which generate a lot of questions itself.
As a matter of fact, out of past character, Warren Buffett went into the tank for Obama, making you wonder if he saw the problems Wells Fargo was going to be enduring for years, let me rephrase that, Buffett did know the condition of the company, as he’s probably better at that than possibly any living person, and positioned Wells Fargo for a bailout, which his holding company Berkshire Hathaway (BRK-A) has benefited from.
As far as Wells Fargo, they reported they had $23 billion in noncollectable loans for the last quarter, while the numbers of non-foreclosed homes they weren’t required to report seems to be staggering. This is true of all banks of course, which means there is no real way of determining their health, which suggests it’s far worse than being presented to the public.
The banks can report all the earnings profit records they want and use it for the marketing tool they and the government want in the midst of Americans continuing to be disgusted by both, but in the end it will eventually catch up with them, where we will finally be presented with the real numbers and condition of the banking industry.
What is happening now, is the hope there will be a true recovery where it won’t matter to people whether numbers were fudged or not, as long as things get better economically for them. In other words, this is a game of chicken where the banks and the U.S. government are betting time will solve the problem they’ve put themselves in a corner with. But the numbers and report from Wells Fargo shows that time is running out on that hope, and it’s much worse than being acknowledged.
Take into account the reality of the projected increasing failure of residential home loans in the first part of 2010, along with the devastation coming from failed commercial loans, which are expected to explode in the second half of 2010, and the idea of recovery for banks is a joke, along with the bottoming out of the recession. This doesn’t even include the growing loss of jobs and other significant factors.
By the way, I’m only using Wells Fargo as an example of the condition of most banks in America, so as not to confuse everyone with an overload of variables which would murky the waters. Each bank could be deconstructed and shown very similar circumstances which would only vary as far as they’re exposed to different sectors of the market.
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