Dec 14 The top U.S. securities regulator has
questioned Wells Fargo & Co over its accounting for a
roughly $20 billion portfolio of troubled loans.
In a letter sent in September that became public on Tuesday,
the Securities and Exchange Commission (SEC) asked the bank's
controller, Richard Levy, to explain how Wells Fargo went about
valuing the portfolio, which it acquired primarily by buying
The SEC's questions, which may represent another headache
for Wells Fargo following a sales scandal, relate to assumptions
the bank made in determining how to value the loans. On a
portfolio of so-called "Pick-a-Pay" mortgages, for example, the
discussion focused on metrics such as borrower credit score and
Those valuation assumptions affect Wells Fargo's earnings in
that, when banks acquire distressed assets, they must value them
in a way that involves some guesswork about whether the loans
will be repaid. The values can rise or fall significantly over
time, depending partly on the accuracy of the guesswork, which
in turn can lead to gains or losses.
In recent months, stock analysts at firms including Keefe,
Bruyette & Woods and Credit Suisse have raised questions about
whether Wells Fargo's earnings are supported by underlying
business growth or accounting maneuvers.
In a Sept. 23 note, Credit Suisse's Susan Katzke said the
bank's "shares were pressured by debatable earnings quality,"
even before a sales scandal erupted on Sept. 8, hammering its
"There is this sense they are managing earnings and the way
you can manage earnings is if you interpret accounting in
beneficial ways at the appropriate moments," said Charles
Peabody, analyst at Compass Point Research & Trading. "I don't
think that is necessarily a bad thing. The problem is that when
you get on that treadmill it's hard to get off it."
Wells Fargo's Levy responded to the SEC's questions in
detail in an October letter. His response included tables
showing how and why values changed over time.
In correspondence the next month, the SEC's senior assistant
chief accountant, Stephanie Sullivan, said the agency had
completed its review.
Valuing such loans "is challenging, and that is the answer
that Wells Fargo is offering," said Judy Beckman, an accounting
professor at the University of Rhode Island.
Spokesmen for the SEC and Wells Fargo declined to comment.
The SEC regularly questions companies on their earnings
reports. The regulator sent 2,905 such letters to companies
during the 12 month period ended June 30, according to a report
from Ernst & Young.
In September regulators ordered Wells Fargo to pay $190
million in fines and restitution to settle charges its employees
created as many as 2 million deposit and credit card accounts
without the consent of customers.
The bank faced more trouble on Tuesday when it was the only
major U.S. bank that failed to convince regulators it could go
bankrupt without causing a major market disruption.
(Reporting by Dan Freed in New York; Editing by Lauren Tara