Wells Fargo (WFC) helped spur the latest bank rally when it pre-announced a big, profitable quarter. This morning it reported the official numbers, even exceeding revised analyst expectations.
But it wasn’t the cleanest number imaginable. In fact, while most banks said they saw little effect from FASB’s mark-to-market rule change, Wells took advantage of it in a big way.
This note was in the release:
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.
So that’s about a $4.4 billion benefit form the rule change. Given that the bank only made a net profit of $3.05 billion, that more than explains the whole thing.