Wells Fargo Posts Record Profit
When you hear about something like Wells Fargo posting record profits, I think you should resist the temptation to do what I saw some TV anchors doing this morning and start wondering if banks are in better shape than you thought. Banks are in terrible shape, and as a result of that the government is taking drastic steps to help banks out. And it’s because of those drastic steps that the banks are posting operating profits.
The main driver of the profits is that the interest rates banks need to pay is now extraordinarily low. That makes banks’ basic operations more profitable. These profits are further bolstered by the fact that banks are not, at the moment, being forced to fully account for lost investment income. And on top of that, banks are able to operate without being properly capitalized because they’ve all gotten increasingly explicit government guarantees. It would be a bit as if the government decided to save GM by just agreeing to purchase cars as fast as GM can make ‘em.
Which isn’t to say that these policies are a bad idea. It’s just to observe that the profits are less a sign of recovery than they are a sign of how much policy activism we’re witnessing.
44 Responses to “Wells Fargo Posts Record Profit”
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April 9th, 2009 at 2:49 pm
Like saying that national health care is profitable because government runs the system.
April 9th, 2009 at 2:50 pm
So, the logical fallacy for this post is false dilemma? All banks are either in good shape or in bad shape? Seems to me that the conditions of banks fall somewhere on a continuum between very good and very bad.
April 9th, 2009 at 2:52 pm
I thought Wells Fargo was one of the big banks that didn’t completely screw themselves in the Subprime Mortgage debacle, considering that they’ve bought some of the banks that have done as such. It would only make sense that they post a profit.
April 9th, 2009 at 2:59 pm
Yea, this is Wells Fargo, not on of the other loser banks. That said, they should be investigated because a large percentage of that profit is from $35 overdraft fees.
April 9th, 2009 at 3:00 pm
But profits did beat expectations. This report was a bit of good news, right?
April 9th, 2009 at 3:01 pm
Did they get some cash money from AIG? Wonder what kinda difference that would’ve made.
April 9th, 2009 at 3:05 pm
I’d say thats an understatement. With the accounting rule changes they can just keep reporting what they hope their assets are worth till they reach that point or go bankrupt.
A wonderful trick, designed to make all the banks look recovered while still holding on the junk assets.
April 9th, 2009 at 3:08 pm
It would be a bit as if the government decided to save GM by just agreeing to purchase cars as fast as GM can make ‘em.
Which actually would be the sensible thing to do; you swap them for old used cars. Voila, instant enviromental improvement. (Yes, I know, GM would still need to restructure quickly.)
Sadly, the crappy paper isn’t useful like that.
max
['Backwards, yet also upside down!']
April 9th, 2009 at 3:23 pm
Any new bank securities, however, should be printed on Charmin stock. Just so there is an actual market value.
April 9th, 2009 at 3:26 pm
But profits did beat expectations. This report was a bit of good news, right?
Yes. If we had no TARPs or bailouts or stimulus this probably wouldn’t have happended.
Are things turning around? What are the metrics to look at? The credit market?
Isn’t employment a lagging indicator?
April 9th, 2009 at 3:41 pm
Could you clarify what you mean by “policy activism”? It’s such a sweet-sounding phrase that I almost forget about the taxpayer end of it.
April 9th, 2009 at 3:45 pm
“Yes. If we had no TARPs or bailouts or stimulus this probably wouldn’t have happended.”
OK, but everyone already knew about TARP and bailouts yesterday. The news today was that, even taking into account TARP and such, earnings were surprisingly good.
I’m not declaring the recession over. I’m just saying the Wells Fargo annoucement was a little bit of good news.
April 9th, 2009 at 3:51 pm
Big fan of your’s Matt and I think your initial point rings true, folks shouldn’t draw conclusions about the investment banking and domestic banking industry as a whole from Wells Fargo’s first quarter earnings.
I do however take issue with your conclusions about why Wells Fargo is profitable. Unless you’ve seen the numbers, aren’t you being more than irresponsible drawing these conclusions? Wells Fargo, unlike the other top 3 banks, wasn’t a heavy player in the investment banking markets; didn’t issue a lot of crappy loans (and those it acquired from Wachovia, were substantially written off at the time of the acquisition); and generally has a more conservative business approach.
Instead of jumping to defend the often cited, but not proven conclusion that the banking industry is largely insolvent, perhaps you should hold your fire until the NUMBERS come out to dismiss Wells Fargo’s results as illusory.
April 9th, 2009 at 4:00 pm
Interesting that Matt is now passing himself off as an expert banking analyst.
April 9th, 2009 at 4:08 pm
It would be a bit as if the government decided to save GM by just agreeing to purchase cars as fast as GM can make ‘em.
===========================================================
The government owns GM. Why would they purchase cars from themselves?
The essence of Capitalism is to strive to destroy competition and dominate markets. By whatever means necessary. Society theoretically benefits from this ruthless equation.
The government owns an automobile company and will be selling cars in a highly competitive market with taxpayer dollars on the line. The government, like any competitor, should enter this market with intent to dominate.
It is a Machiavellian world, and the government just happens to have built in advantages. It should use them. It can deflect any future criticism using the classic corporate defense, the moral and ethical responsibility it holds to its shareholders, which, by dint of circumstance, happens to be us.
April 9th, 2009 at 4:16 pm
Possibly because Matt might be looking at ashtonadvisory.blogspot.com … Which called this on March 11th.
Regarding the banks sheets, whose to say that these are good or bad investments? Today, they’re bad investments, but five years from now? Time heals a lot of things in the financial world, and I’d imagine that some of that bad paper will be worth more than it is down the road. Provided that they can service it, what’s the point of killing the institutions that hold it? That’s why Barney and the Administration realized that the current state of FASB 157 was so messed up that they lobbied the accounting board to change it. They woke up…Matthew should as well.
As for this idea of lost investment income…Is it lost income if you continue to hold onto the investment? I own stock that is currently less than I paid for it…Judging by today’s reaction, I should be up again…did I ever lose money? No. More importantly, have I made money yet? NO. Whether I lose or make money is completely dependent upon when I sell it. Again…SEE ABOVE.
Finally, on the policy…Yes, that has helped without a doubt. Less so for Wells…although Shelia Bair inserting herself (perhaps illegally) into the Wachovia deal certainly helped. BTW, if she’s such a genius, what do you think would have happened had she allowed the Citigroup deal to go down with Wachovia as opposed to sabotaging it? Might have saved the taxpayer tens of billions of dollars. But she’s such a genius right?
But I digress. Getting back to the previous point…YES, the intervention has helped greatly. Now the next task is to demand taxpayer money back (with interest). All of you are for that right? I mean, everyone was so upset with the banks getting bailed out…they should pay us all back ASAP right?
BTW, how are the other bailouts going? GM, Chrysler? Wonder if we’ll see a dime from those grand institutions…
April 9th, 2009 at 4:46 pm
Ed Smithe -
I can’t decide whether your bizarre love for your friend’s blog is charming or scary. I find the writing impenetrable.
I’m glad to see you approve of the very minor changes in FAS 157. All the bankers in DC are pissed that the changes weren’t more substantive, but I’d be shocked if any more “assistance” is forthcoming. I, for one, am glad that we can put the idiocy of the mark to market discussion behind us.
The idea that there’s no point in valuing investments today because they might be worth a lot more (or a lot less) five years from now doesn’t make any sense to me. Why have a balance sheet at all? How do you put a value on any of the assets of any company when all of them are subject to unexpected changes? And yet we do.
Somehow, I’m doubtful we’ll hear the same outcry when GM is forced to mark down the value of its factories in its 2008 10-K. After all, the car market might rebound and bring those factories back to full production 5 years from now. Who can know? Is the factory actually worth any less just because sales are down?
As regards GM and Chrysler, I wonder what odds you’d place on the eventual recovery of money to AIG and Citi being greater than the eventual recovery from GM and Chrysler. Even with the government doing everything it can to make the financial companies profitable (I’ve missed the news about similar attempt for the automakers), AIG and Citi seem to be blowing through their bailouts much faster than their cousins in Detroit.
April 9th, 2009 at 4:58 pm
Wells is one of the most “conservative” of the big banks. They didn’t get involved in the pursuit of crazy i-banking schemes, and maintained rigorous lending standards throughout the oughts. While BoA, WaMu, and others abandoned lending standards and dipped into the CDS and i-banking barrel in order to reap bigger rewards, Wells abstained. I know some folks who left some of the more irresponsible banks (and they were big ones) for high-finance at Wells (asset based lending division, nothing shady, just making loans in excess of 25M to manufacturers, small potatoes). Lending practices across the board were lowered at the banks that are now struggling. But none of this is inside info – it’s common knowledge that Wells was prudent, and an exception to the irresponsible banker label. Too bad Matt overlooked this. WRT to the 25B that Wells was induced to take from the TARP trough, they really were pushed into taking it. The capital required for the purchase of Wachovia was raised on the market. The govt. injection really was for the sake of appearances, to shelter the shit banks from the perception that failure was their fault, and an effort to stave off the collapse of those banks. Ironic, or maybe not, that the govt’s plan to shelter the shit banks from the wrath of investors by dispensing TARP funds to both shit and solid banks resulted in ALL banks being labeled as turd-institutions and Matt assuming that Well’s profits were a result of “wise policy.” Had the govt. let the shit banks fail, Wells would have likely posted even bigger gains. My 2 cents – let the shit banks fail, or seize them and break them up. Don’t reward bad behavior. “Conservative” credit unions (USAA) and banks like Wells had nothing to do with the meltdown, and represent a good behavioral model and safe investments. Good policy does not equal giving bailouts to bad banks, but rather systemically reforming the system, like maybe bringing back a variant of Glass-Steagal for starters. Too bad no one has the balls or integrity to push for this.
April 9th, 2009 at 5:03 pm
Per the ‘drastic step’ of a steep yield curve, where the short end of the curve is much lower than the long. The recession before this one was not an ‘average’ recession (though the yield curve was steep then too), in that the banking sector sailed through it relatively unscathed. Banks getting hammered in a downturn is normal, and the yield curve as it is now, the ‘drstic step’ is also perfectly normal, and the banks earning their way out of the hole is also perfectly normal. This time is different because of the panic in September, that some ibanks went down, and that the losses are bigger (but not so much bigger as one reads in the newspaper, banks in the past lost tons and tons of money during past downturns).
April 9th, 2009 at 5:05 pm
Brendan,
I suppose that the writing might be a bit airy (he’s actually received some job opportunities as a result of it), but it’s difficult to argue with the guy’s track record. Moreover he’s a very good friend, and I think that people in this forum would learn something if they read him everyday…He did it successfully for 30 years after all.
As to valuing those assets, yes, you’re correct. I’m sorry that I left the impression that they shouldn’t be valued at all. I believe that the previous rule allowed you to in essence value investments at what you paid for them. Let the market (read: individual investor) figure out what they’re worth.
As to your final bet…That’s a good one. AIG, I suppose is being run into the ground…and there’s little hope that they’re going to be able to pay back those loans. Perhaps had they left the running of that company to Hank Greenberg, they wouldn’t be in this predicament. But, little Eliot Spitzer wanted to be governor…Although I hear that Greenberg might be interested in running the company again.
Citigroup I’m going to have to disagree with you on. From what I’ve heard, they’re in much better shape than anyone has given them credit for. Moreover, I think that Parsons can keep the administration off of their back sufficiently enough to allow this new board to work this out. They brought in some good people which should help quite a bit. Moreover, they’ve been in a similar position before and managed to survive. I’m pretty confident they’ll do it again.
April 9th, 2009 at 5:11 pm
Yglesias gets results! From the post above:
“It would be a bit as if the government decided to save GM by just agreeing to purchase cars as fast as GM can make ‘em.”
From Reuters this afternoon:
President Barack Obama, saying he was committed to a strong U.S. auto industry, announced on Thursday the government would buy 17,600 new fuel-efficient vehicles from ailing American automakers by June 1.
Any more suggestions, Matt?
April 9th, 2009 at 5:26 pm
“The new cars should cut the federal government’s total gasoline consumption by 1.3 million gallons annually, the White House said.”
Yeah, and increase maintenance costs…If only they could get everyone else to buy GM.
Moreover, how is it that they can just commit to buying those vehicles? Isn’t there an acquisition process that they have to go through? This kinda sounds like what the previous administration did with respect to Haliburton…the difference being that Haliburton was actually one of the few companies in the world that had the capability to do what they were contracted to do in some cases. Nevertheless, no bids are not a good practice.
April 9th, 2009 at 6:33 pm
I would second Ed Smithe’s rec. of Ashton advisory. The guy has been making sense and has been right. The best blogs on the financial crisis have been by people who are actually in the business such as A credit trader, and economics of contempt blogs.
April 9th, 2009 at 9:12 pm
A record $3 billion profit for Wells Fargo!!! Wow! And to think all it took was $25 billion in TARP money and the new accounting rules “providing more accurate estimates of market values” which show $3 billion less in charge-offs despite conditions being far worse.
April 9th, 2009 at 9:26 pm
Wells’ results are more do to accounting for Wachovia than TARP. What has helped Wells is the government lowering mortgage rates and starting a refi boom. What is interesting is that TARP made Wells reduce their dividend to $0.05 in a quarter where they will report an all-time profit. Who says bank investors aren’t getting a haircut?
April 10th, 2009 at 12:22 am
Воспользоваться услугами данного блога мне посоветовали друзья, которые ещё давно поняли его информативность. С тех пор я каждый день захожу сюда с целью узнать как можно больше информации по моей любимой тематике. Стоит заметить, что вся информация на сайте размещена удобным для пользователя образом. Тематики подобных сайтов меня притягивали с давних пор, но сейчас я понял что нет смысла тратить время на поиски необходимой информации, если всё уже собрано в одном блоге. Спасибо всем кто разделил мою мысль вместе со мной. Ещё увидимся на страницах данного блога!!!
April 10th, 2009 at 12:33 am
Долго искал блог на подобную тематику и наконец нашёл. Удивительно что раньше я не знал о его существовании, ведь с давних пор занимался вещами такого рода. Порадовало, конечно, наличие полезной информации лично для меня и я абсолютно согласен со всеми остальными людьми, оставившие свои комментарии в данном блоге. Удобная навигация, думаю, также многих порадовало. Хотелось бы и себе замутить такой блог, да нет время, поэтому легче пользоваться этим блогом. Администратор блога – молодец. Так держать! Всё супер, с огромным уважением отношусь к людям, создающие блоги на такие тематики!
April 10th, 2009 at 8:40 am
These subsidized earnings mean that the Geithner-Summers scheme for letting the banks work through their writedowns will probably work in the long run.
You might see effective euthanization of some worst case banks through forced asset sales. But in general the Krugman-Roubini-Johnson faction will not be having their way.
April 10th, 2009 at 10:42 am
An interesting , although a little complicated explanation of the banks’ recent profits.
April 10th, 2009 at 6:57 pm
Как бы мы все не старались все равно будет так, как задумала вселенная. Пока я читала мой мозг умер.
April 11th, 2009 at 2:33 am
Прелесть! Я тоже мечтаю) Возьму – и сделаю… У меня получится. Спасибо, очень глубокая и позитивная статья.
April 11th, 2009 at 11:42 pm
Супер, независимое мнение, независимого человека. Классная тема, обязательно это запомню и другим расскажу. Миленькие мои, ну о чем вы говорите, об этом уже столько сказано пересказано.
April 12th, 2009 at 9:43 am
Кошмар. Только что смотрел новости просто волоы поднимаются, как же жить будем если цена на нефть так упала. В бюджет заложили одни цифры и доходы, теперь видим другие. Интересно на сколько хватит нам нашего “стабилизационного фонда” с таким подходом. Сорри, что я так близенько к теме. Но это тоже важно, как мне кажется.
April 13th, 2009 at 2:22 am
Прикольно, такое не часто прочитаешь. Не всякий дурак до такого додумается. Да если бы это было кому-нибудь интересно, наверное было бы больше комментариев.
April 13th, 2009 at 3:54 am
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Joannah
http://windscreensite.com
April 14th, 2009 at 10:03 am
Прелесть! Я тоже мечтаю) Возьму – и сделаю… У меня получится. Спасибо, очень глубокая и позитивная статья.
April 15th, 2009 at 12:51 am
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Sarah
http://blanket.ws
April 15th, 2009 at 7:14 pm
Да это нечто. С этим трудно не согласится, но трудно поспорить. Сколько людей столько и мнений. Удивительная вещь эта жизнь.
April 15th, 2009 at 8:58 pm
Оно то все так, но как по мне если есть посетители на сайтов, то есть и комментарии, т.к. каждый хочет принят участие в обсуждении той или иной темы, тем самым засветиться в кругу блогеров, так что считаю количество комментариев прямопропорционально зависит от количества посетителей,.. ну не берем спам естественно
April 16th, 2009 at 5:34 pm
Привет всем. Я далеко не единственная девушка, которая пользуется услугами и информацией данного сайта. Хочу поблагодарить администрацию и всех остальных людей, принимавших участие в создании данного проекта. Для меня этот блог автоматически вошёл в список любимых. Практически всё свободное время я провожу именно здесь, получая новые и новые навыки. Надеюсь, что я не единственная девушка которая регулярно посещает сайты на подобную тематику. Я надолго останусь на этом блоге – говорю это с полной уверенностью. Сейчас иду отдыхать, но наберусь сил и буду заново бороздить просторы вашего блога. Спасибочки!
April 16th, 2009 at 11:39 pm
Думаю, что один из главных способов – провокация. Сказал что-то чуть категоричнее чем нужно (и чуть неправильнее) – кто-то обязательно не выдержит, поправит. Кстати, люди начинают активно комментировать, когда авторитет у блога уже есть и посещаемость какая-то…
April 17th, 2009 at 9:18 pm
Супер, независимое мнение, независимого человека. Классная тема, обязательно это запомню и другим расскажу. Миленькие мои, ну о чем вы говорите, об этом уже столько сказано пересказано.
April 18th, 2009 at 11:43 pm
А на повестке дня только глянцевый гламур или всесторонний охват? А то вот я мыслей имею всяких много, а визуализировать их не умею…
April 19th, 2009 at 2:43 am
Мой сайт вчера добавили Яндекс Каталог. Это здорово, я вот сел и специально пару десятков страниц его пролистал. Пурга редкая, у меня даже вопросы возникли не по знакомству ли туда добавляют. Нет, я знаю о том, что за денежу можно оперативно добавиться. Но ведь не платят же общество любителей волнистых попугайчиков. Я не шучу, оно там правда есть. Жесть. Вообщем для себя принял решение все свои проекты попробывать в Яка добавить. Вам тоже рекомендую, сайт хороший, я уже видел где-то что Вам об этом говорили в комментариях.