New off-balance sheet rule: Little impact on Wells

January 21, 2010

The new accounting standard requiring banks to bring assets back on balance sheet had a negligible impact on Wells Fargo. Despite having over $2.0 trillion of off-balance sheet assets, Wells consolidated just $10 billion of risk-weighted assets when the new standard took effect January 1. (See slide 17 in the bank’s supplemental earnings release)

wells 166 better

The idea behind the new accounting standard is to bring hidden assets back into the light of day so that regulators can insure proper levels of capital are held against them. With Wells, this appears not to be happening.

Last summer, the bank estimated the new standard would raise risk-weighted assets by $46 billion.* In its last quarterly filing, it revised the estimate down to $25 billion.** When the standard finally went into effect, the figure was just $10 billion.

Total off balance sheet assets, meanwhile, were over $2.0 trillion at the end of September. (see page 31)

One reason for the giant difference is that “conforming” mortgages comprise a bit over half of Wells’ off balance sheet assets. These are eligible for a government guarantee via Fannie Mae, Freddie Mac, or Ginnie Mae, argues the bank, so it needn’t consolidate them since they pose no risk to its balance sheet.

Chris Whalen of Institutional Risk Analytics has argued this may be inappropriate. Some of these mortgages may be rejected by government guarantors — a more likely prospect it would seem with FHA beefing up standards. That could force Wells to take loan loss reserves against them.

A bigger question is the $900 billion worth of off-balance sheet assets that don’t qualify for a government guarantee. If indeed it’s fair for Wells to say it has so little exposure here, the bank should explain why to investors.

Ironically, the ultimate off balance sheet vehicles are the GSEs themselves: Fannie, Freddie and Ginnie Mae (which securitizes FHA loans). Though backed by taxpayers, the nearly $5.0 trillion worth of mortgages they guarantee aren’t included on Uncle Sam’s balance sheet.

With mortgage lending almost wholly dependent on GSE guarantees at this point, more of the nation’s housing stock disappears off-balance sheet every day…


*See page 13 of the Q2 10-Q.

**See page 14 of the Q3 10-Q.


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“Though backed by taxpayers, the nearly $5.0 trillion worth of mortgages they guarantee aren’t included on Uncle Sam’s balance sheet.”

As I understand it, a lot of the MBS that the Fed purchased through QE are GSE, which is now on the Fed’s balance sheet. The Fed’s balance sheet is now over 2T, so there could be quite of bit of agency debt there.

Posted by Tom Hickey | Report as abusive

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Posted by New off-balance sheet rule: Little impact on Wells | Skinny News | Report as abusive

I suppose as long as the OMB is in denial everyone else gets to be in denial too. The consolidation wolf is well and truly at the door, but he can only enter if somebody sees him.

$2 trillion of off-balance-sheet stuff? But that’s insane.

Posted by John McLeod | Report as abusive

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Posted by Crisi finanziaria e sviluppi – Pagina 234 – I Forum di Investireoggi | Report as abusive

Remember they bought Wachovia which was the biggest player in the commercial real estate segment. There’s probably a big chunk of the $900B there.

Posted by HF analyst | Report as abusive

I wonder how much for Bank of America, JPMorgan Chase, etc.. Sum-up everything-I think huge money will disappear.

Posted by Titus | Report as abusive

[…] That’s exactly what these giant financial firms can do. I guess it’s not enough that they can lie through their teeth about the true value being reported on the financial statements through mark-to-model accounting. Apparently that rule just doesn’t provide them with enough creative maneuvering room, so to make absolutely certain they have all the room they need to stray as far away from the truth as is humanly possible, they’ve been given permission to keep two sets of books! Here is an older Reuters news story from 201o indicating that a minor change to the rules allowing “off-balance-sheet” accounting (keeping of the second set of books) would not impact Wells Fargo to any great degree, since after the rule change Wells Fargo still had over $2 trillion in off balance sheet assets! […]

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