Reply #9: Maybe squattin' in the tall cotton?

[Dr.Phool]

Ilargi: Wells Fargo announced record profits yesterday, and still lost 5% of their share value at the end of the day. The most ridiculous analyst out there, Dick Bove (or is that Bové?), was on CNBC early in the morning singing the bank's praises, only to downgrade it to a sell advice a few hours later. If that last Bove Move was what drove the stock down, investors deserve all the losses that are coming to them. "“It’s definitely had an effect on the market,” said Tim Smalls, head of U.S. trading at Execution LLC in Greenwich, Connecticut. Bove “has a very good following and very long track record of consistency <..> “ " Oh, Bove's consistent alright, that part is true. He's consistently wrong when it counts.

My first thought when I saw that Wells Fargo had announced record profits was: "How is that legal?" You see, I had been reading Reggie Middleton's If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Part 4 - Wells Fargo on Monday.

Wells is one of 32 banks on Middleton's May 2008 Doo-Doo 32 list, alongside for instance Citi, JPMorgan Chase, BofA among others. And in his Monday post, Middleton explained in great detail why Wells Fargo is on that list, which he very diplomatically slash euphemistically calls "a list of institutions quite likely to hit the fan from an investor's perspective."

Middleton goes through a few categories where he finds Wells Fargo wanting:

* The risks posed by the housing crisis and arcane financing vehicles are drastically under-appreciated by the sell side...
* Write downs on investment securities along with other assets like MSR (Mortgage servicing rights) and mortgages held for sale will further erode the shareholder's wealth.
* Risk emanating from the massive derivative exposure.


By the time you're done with his analysis, let's just say Wells would not be a priority on your investment list, other than to short them into the curlies.

However. Wait a minute. There is a caveat the size of Alaska here. Because if a bank that is as deep in doo-doo as Wells is according to Middleton, can still report record profits, you might want to look, and very carefully, at the system that allows it to do so. People do business with Wells Fargo. They buy shares, they sign for mortgages and other loans, they deposit their savings. All these actions are based to a large extent on trust. And when a bank can paint rosy pictures toward the outside world while hiding who knows in toxicity, writedowns and losses, and get away with it, there is something very wrong with regards to the trust issue. The word fraud comes to mind.

(snip)

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