Amazing tales of banking wonder and mystery

In the midst of an economic meltdown, Wells Fargo reports its best quarter ever. How does that work? Plus: Stress test magic -- every bank gets a pass.

Published April 9, 2009 3:48PM (EDT)

Today's news from the banking sector is confusing. Wells Fargo has long boasted that its balance sheet was healthier than its biggest competitors, in part due to steering clear of the worst excesses of the subprime mortgage lending frenzy. But how can the bank announce a record  profit for the first quarter of 2009? Remember: That's a quarter in which GDP growth is likely to have declined by about 7 percent, the economy shed nearly 2 million jobs, and a chorus of doom-crying critics declared the banking system largely insolvent.

Yes, I know, millions of homeowners are taking advantage of insanely low mortgage interest rates to refinance, and that's good for banks with big lending portfolios, but still, there's a major disconnect here. The worst economic contraction since the 1930s and Wells Fargo pulls down record profits? The stock market is delighted by the news, but I'm not so sure that the 654,000 people who applied for unemployment benefits for the first time last week will be equally pleased. Big bankers doing great while the little guy gets crushed? Haven't we heard that song before?

Wells Fargo & Co., the second-biggest U.S. home lender, earned about $3 billion in the first quarter, exceeding the most optimistic Wall Street estimates and spurring a rally in bank shares on speculation that the industry is shaking off the global credit crunch.

Combine that news with a New York Times article on the stress tests and you've got even more of a head-scratcher. The article provides ample support for the theory that stress tests were designed to be a sham from the get-go.

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs "exceptional assistance," the government, that is, taxpayers, will provide it.

But the tests, which are expected to be completed by the end of this month, are being conducted out of public view. Federal law prohibits the unauthorized disclosure of the results of any bank examination, including the stress tests. Some investors wonder if the new tests are rigorous enough, given the potential problems lurking inside the banking industry.

But then comes this:

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

OK, all banks will "pass" but not all banks will be "winners"? And the "losers" will be "pressed" to participate in Geithner's toxic asset auction scheme. Which itself is hardly a harsh punishment, depending on how it is administered.

Finally, there's this:

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

Italics mine. And I'll believe it when I see it.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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