RCM Comment: I have been writing at length about the creative “better than expected” EPS coming from the banking sector. Today, I offer the analysis of Dave, a colleague on gata.org who really nails the Wells Fargo fraud, enjoy.

“So far — and especially in Q1 — Wells/Wachovia benefited from gov’t and bank-specific foreclosure prevention and moratorium. This kept Q1 foreclosures at a year low but pushes them down stream. Meanwhile, Q1 defaults surged which will lead to a surge in foreclosures in Q2 and beyond. ”

More from Dave on WFC…

Right as the CFO of Wells Fargo was on CNBC spouting out that WFC has a better loan portfolio than others, this piece of data hit the newswire showing that in California mortgage defaults hit a new record during the first 3 months of 2009:

http://www.calculatedriskblog.com/2009/04/dataquick-mortgage-defaults-hit-record.html

Two points of note: 2009 will probably be a record year for notices of default AND “defaults are movin’ on up into the mid and high priced areas.” This is the “better loan portfolio” of Wells Fargo: 41% of WFC’s mortgage portfolio is based in California AND 50% of WFC’s portfolio is comprised of pay-option ARM mortgages, which are entering into a “bulge” period of resets and are widely considered to be the most toxic of the 1st lien mortgages. Anyone want to believe the statement made by the CFO of WFC? The comment uttered by this guy is about as credible as O.J. Simpson’s claims of innocence.

Mark to fantasy and Wells Fargo’s earnings

… is nothing more than legalized accounting fraud being presented to the world in the form of Wells Fargo’s 1st Qtr 2009 earnings release. As suspected, the infamous “record profits” preannounced 2 weeks ago by Wells Fargo are nothing more than a result of our Wall Street-financed Government, including our President, forcing the FASB to change the way big banks account for toxic assets. As per WFC’s earnings release today:

“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.”

Essentially, what WFC did was post $5.2 billion mark to fantasy gains, which were then added into its revenues, by reversing out previous charges expensed against their securities and loans held for sale. Without this gain, Wells Fargo loses a couple billion.

In looking at WFC’s balance sheet, I see that their “securities held for sale” miraculously jumped to 27% of their net loans vs. being only 21% of loans at the end 2008. This is obviously WFC taking full advantage of the new mark to fantasy accounting standard and piling as much toxic waste into this category and marking the price levels up substantially. Be really interesting to see what kind of worthless crap was conveniently moved into this category.

I’m sure there’s several billion worth of further indiscretions and outright fraudulent accounting that was incurred during WFC’s record-breaking 1st Qtr. For those interested, here’s the press release:
http://finance.yahoo.com/news/Wells-Fargo-Earns-Record-305-bw-14995023.html?.v=1
Now we wait for the 10-Q to be filed so we can determine just how much smoke the crooks running Wells Fargo….