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Is Wells Fargo's Profit a Sign of Life?

Here’s what the bank’s recent announcement has in store for the economy.

It looks as if there’s nothing to be so ecstatic about Wells Fargo’s profit boost when the bank posted $20 billion in revenue. Businessweek reports, “Earnings of 55c per share were more than double analyst predictions. Revenues surged to $20 billion as Wells Fargo boosted mortgage lending and integrated troubled rival Wachovia, which it acquired at the end of 2008.”

Wells Fargo sought to rehabilitate not just its financial scorecards but its reputation as well when it bought the troubled Wachovia. Everyone then was pessimistic with the bank’s future, given the amount of distressed loans that it inherited.

We believe this can be an impetus for more announcements of regained earnings by other banks as well however, much like with Citigroup’s previous rally, there’s skepticism among analysts. After all, these financial institutions haven’t unloaded their toxic assets yet. More so, applications may have surged this quarter (and would likely continue if the Treasury’s toxic asset cleaning prove to be successful) but general economic conditions continue to deteriorate on the downside.

Looking back, the financial industry was rocked by the lose regulation of the government on the massive securitization of financial instruments. Apart from this financial industry recovery that Wells Fargo started, the government has to fix larger problems that continue to curtail full recovery. We agree on Jeff Segal of breakingviews.com when he suggested, “A better idea is regulatory consolidation on the federal level, with broad new statutes that apply to surviving regulators. For example, underwriting should be based on consumers’ ability to repay. Common lending standards on sensible principles would limit the wiggle room in which toxic lending products thrive. And reducing the number of agencies should reduce regulatory arbitrage.”

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