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Jonathan Weil of Bloomberg wrote today about the implications of Fair Value accounting under SFAS 157, and the possibly misleading results that can be reported under this new standard. It’s a quick read about Wells Fargo’s quarterly earnings statement, well worth your time.
In the article, Mr. Weil writes, “Here’s the rub: The footnotes [to the earnings statement] show the vast majority of the $2.24 billion in derivative losses were Level 1 or Level 2, while the $2.01 billion in [mortgage-servicing rights] gains were all Level 3. In other words, it’s a safe bet the losses were real” while the gains may have been conjured up by turning a dial.
This New Dial was granted us by SFAS 157, whose primary intent, as we understand it, was to promote transparency in public and private markets. Is it working?