Regarding Profits At Wells Fargo And Goldman Sachs

Since Wells Fargo (NYSE:WFC) announced last week that it expected record first quarter profits, I have been looking for some kind of reality-based explanation. Certainly the market liked the news. But what does it mean, this alleged $3 billion in profits? Tuesday, we received some additional news, as KBW downgraded the stock:

Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.

First-quarter net income rose 50 percent to about $3 billion, Wells Fargo said last week in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock. The bank attributed the profit to a surge in mortgage originations and revenue from Wachovia Corp., acquired in December. Full results are scheduled for April 22.

“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”

I added the bold type there. In other words, do not read too much into these “record profits.” Also bear in mind that some of last week’s bullishness came after the government announced that all banks passed their stress tests. Unfortunately, the stress tests relied heavily on internal data and analysis performed by the companies themselves, with minimal government oversight. As the market rallies on the idea that banking problems have been overblown, and are largely behind us, bear in mind that this “good news” is coming from the very same people and companies that have lied so often during the past two years.

At the same time, as investors and traders, we should consider the trillions that have been paid out to these financial institutions, and the myriad consequences. Karl Denninger reports that Goldman Sachs (NYSE:GS) may be getting ready to report their second best quarter in history. Denninger:

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were “fully hedged” against a potential counterparty default by AIG.

One wonders - was that “hedge” to be short the equity on AIG itself, perhaps?

Why is this important?

Because if that’s how Goldman hedged they got paid twice and the taxpayer literally got robbed.

Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not “polite inquiries.”

If in fact Goldman (or anyone else) was “hedged” against a possible credit loss from their CDS with AIG and they were able to collect on that hedge (no matter what it was) those payments through AIG need to be clawed back immediately as nobody is entitled to be paid twice for the same risk and reap what amounts to a windfall profit by quite literally engineering a multi-billion dollar transfer of funds from the Taxpayer to the firm!

This is not small potatoes either - we’re talking $100 billion+ in aggregate with these various banks on a worldwide basis.

We the people deserve answers on this right now and if persons in our government handed these banks $100 billion dollars of our tax money for what was a covered bet, allowing them to collect twice on a risk that had not yet been realized (when at most they were entitled to collect once via their private hedging activity) every single person involved in that scandal must be immediately removed from office, prosecuted if possible, and every nickel of those funds must be clawed back by whatever means are necessary.

Barry Ritholtz comments on Denninger’s article:

Makes you wonder if having a Treasury Secretary who was a former CEO of Goldman Sachs had anything to do with this.

Indeed, not only was Hank Paulson Goldie’s boy, but he was the same gentleman who so vociferously lobbied the SEC to allow the 5 largest iBanks to drop the net capital rule and leverage up 40 to 1.

So not only did he help set up the disaster, but he then oversaw the greatest transfer of wealth in the planets history - several trillion dollars from taxpayers to the management and shareholders of inept, incompetant, wildly irresponsible companies.

This is theft on the sort of grand scale that calls for the population to revolt. Perhaps the French peasants were right; Time to bring the guillotine for executing nobles and bankers. . .

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