Banks In "Utter Chaos" Dealing WIth Off-Balance Sheet Assets (WFC, PNC)

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BS accounting by the FASB (financial accounting and reporting standards) suspending the mark to market rule last fall doesn't mean the problem magically goes away. Wells Fargo is your smoking gun here, they inherited this typhoid Mary via their takeover of Wachovia in October of 2008.

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"(This guest post comes via Institutional Risk Analytics)


Reading through the Qs for this quarter, a picture starts to emerge of utter chaos when it comes to how banks are implementing -- or not -- the changes by the FASB as to how organizations account for off balance sheet ("OBS") exposures (read: Fed accounting changes last fall allowing the banks not to be accountable for # loans). Let take two examples:  Wells Fargo and PNC Financial.

In the case of WFC, the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB (financial accounting and reporting standards) rule change.  As we discussed in The Institutional Risk Analyst this week, "Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?"

Thus WFC is basically saying that none of the bank's $1.1 trillion in conforming OBS exposures need to be represented or reserved against.  My problem with this is two-fold:  First, the FHA and/or GSEs will return some portion of the securitized loans, so WFC should expplicitly disclose this cost and reserve against it.  Second, it seems to be pretty arrogant for WFC to take such an aggressive positions with respect to these OBS vehicles, even with a third party guarantee, especially given the intent of the FASB rule change.  BTW, WFC has another $0.6 trillion in non-conforming exposures we have yet to hear about.  That is next quarter presumably.

Then we go to PNC, which has much smaller OBS exposure than WFC, smaller by several orders of magnitude.  PNC spends a good bit of time in its most recent 10-Q describing its OBS exposures, the primary vehicle for which is a an unconsoldiated  multi-seller asset-backed commercial paper conduit that is owned by an independent third party.  After spending most of a page explaining that the vehicle is owned by a third party and guaranteed by another third party, PNC concludes that the full amount of this previously unconsolidated entity should come on balance sheet.

Start to see the problem? As we review the banks in Q3, there seems to be no consistency in the way in which banks are implementing the FASB rule.  As we go into the end of Q4 2009, the fun will really start."