FAS 160: The Special Sauce for Investors in Financials

by StockJockey

Monday, April 13, 2009 - 3:40 pm

Are you hungry for more info on how Wells Fargo set the table for the other financials? Sleuths all over the Wall Street continue to scratch their heads over Wells Fargo surprise pre-announcement, including the gumshoes at the Housing Wire, in a follow up to their earlier piece.

It appears, however, that as much as nearly one-third of the bank’s first quarter earnings may be nothing more than the result of an accounting treatment; without such a move, tangible common equity would be 10 bps less than the 3.1 percent the Street expects.

The jump in earnings pertain to FAS 160, an accounting rule first announced in 2007 that became effective on January 1, 2009. The rule addresses accounting for minority interests, and mandates that the ownership interests in subsidiaries held by parties other than the parent corporation be clearly identified and presented as equity for the purpose of consolidated reports. Until now, minority interests in the U.S. have been reported either as a liability or as a mezzanine line item between liability and equity.

The effect of the new accounting rule allows certain liabilities to ‘jump over’ to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity. In the case of Wells Fargo, the bank found itself with up to $824m it could use this quarter as an accounting gain to earnings. Housing Wire

Of course, bulls don’t seem to care. We are at the point where it appears the capital raising will come at us in a pell mell fashion, and few investors seem to be distinguishing between offensive and defensive raises, as Goldman describes it.

This is leaving some analysts muttering to themselves, and if you need further answers, don’t bother calling the CFO or the investor relations department. As the Housing Wire notes, Omerta is the order of the day:

Wells Fargo representatives said they will not answer specific questions centered on the accounting moves, according to another bank analyst.

Analysts, including FBR’s Miller, say they are finding answers tough to come by. “We encourage investors to demand better disclosures going forward, and it is our sincere hope that WFC will revisit its long held practice of not holding live quarterly public conference calls,” he said.

Wells Fargo set the table heading into Goldman’s earnings release, despite the fact that some analysts think Wells Fargo needs to raise $25 to $50 billion in the months ahead, and Goldman will be doing a deal of their own.

Shorts are invited to attend Goldman’s conference call, but might want to sit with their back to the wall. It is not a threat, but it might be an offer you can’t refuse.

Reading between the lines it appears Goldman CEO Lloyd Blankfein will leave the gun, but take the cannoli.
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Josh Rosner on Bloomberg today....

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Wells Fargo Q1 Profits Packed with Accounting Gain
Housing Wire

Wells Fargo May Need $50 Billion in Capital, KBW Says
Bloomberg

UPDATE -GS Reports Early, Deal Prices Tomorrow

Goldman Sachs to Raise $5 Billion in Stock Sale, Posts Profit
Bloomberg

Goldman Posts Profit and Will Raise $5 Billion
NYT

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