Thursday, August 23, 2007

Mark to Make-Believe - Accounting Standards & Keeping it Real

 Someone's been cooking the books perhaps?  What does Level 3 Accounting really mean?

The Rub

Here's the rub: The footnotes show the vast majority of the $2.24 billion in derivative losses were Level 1 or Level 2, while the $2.01 billion in MSR gains were all Level 3.

In other words, it's a safe bet the losses were real, while the gains had all the substance of a prayer. Indeed, Wells Fargo said in its Aug. 6 quarterly report that ``the valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable.''

Moreover, to get to minus $225 million for ``market-related valuation changes to MSRs, net of hedge results,'' Wells Fargo excluded the other $808 million in MSR losses, meaning these fair-value changes weren't hedged at all.

Source: Opinion

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