Fun With Numbers

Here is a cut and paste from the daily market article in today's NY Times:

"Last Thursday, Wells Fargo said it would report record first-quarter profit of $3 billion, easily surpassing analysts’ expectations. Shares of Wells Fargo surged 32 percent Thursday after the announcement. The market was closed Friday.

Wells Fargo shares gave up a small portion of those gains Monday, falling 44 cents, or 2.2 percent, to $19.17 in late morning trading. Earlier in the session shares fell as low as $18.51.

Keefe, Bruyette & Woods Inc. analyst Fred Cannon downgraded Wells Fargo to “Underperform” from “Market Perform,” based on the bank’s current stock price. Cannon affirmed a price target of $12 for Wells Fargo and, in a research note, said he is concerned about the lack of details surrounding how the bank managed to report a record preliminary profit.

Mr. Cannon also said Wells Fargo still might need an additional $50 billion in common equity over the next two years to cover loan losses and to repay the government the $25 billion it provided to Wells Fargo last fall as part of the bank investment program."

Some other smart guy suggested that something was rotten in Denmark on this one. There's just no way this thing holds water.

Information Arbitrage is a blog whose author I fundamentally agree with on most stuff, this issue in particular. Mark to market is a tough task master, and problematic in several respects here. First, there may be a valid intent to hold some/all of these mortgages or securities to maturity. Is there the liquidity to do so? The point I argued with my brother last week was that there may be the intent to do so, but the liquidity may not be there. In order to stave off the greater catastrophe, banks may need to sell some of these, and in the current market will not get the price at which they seek to value them. Second, the implementation of this new "liquid and orderly market" mark rule is just insane. It's a rouse to make balance sheets look better, changes none of the fundamentals and will likely make banks less willing to offload 'toxic' assets at a price that buyers are willing to pay.

The situation is still just as f-d up as ever.

Bert, I rode my bike yesterday. Really fast, for like 2.5 hours. It was windy. While I was riding I was listened to "Terrapin Station" and then some Cake songs. I saw a lot of other people, including some of our team mates. The new saddle is going to be fine.