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Upper Deck ends proposal to acquire Topps Co. (MarketWatch)
When we were, oh, 17 years younger this would’ve been the most important M&A deal of all time to us. Now it’s more like “whoa, those companies are still around?” every time we hear an update on this story. Anyway, Upper Deck has announced that it will cease its attempt to purchase trading card company Topps, noting fierce resistance on the part of Topps management. It’s been a long long time since the last time we purchased a pack of cards (okay, not entirely true — we bought a pack of 1993 Fleer cards from a vending machine at Eckerd last year), but at least back then, Upper Deck were always expensive and glossy, while Topps were cheap and cardboardy. Anyone know how it is today?
Judge unmoved by Whole Foods CEO’s merger comments (Reuters)
Now that the reasoning in the Whole Foods/Wild Oats case has been unsealed, we can see what the judge thought of all the zany development that occured leading up to his decision. Other than the Yahoo message boards fiasco, the other big bombshell of the case was revelation of certain things John Mackey said to the board, indicating that a merger would give Whole Foods pricing power. Turns out, the judge really didn’t care much about that. One antitrust lawyer summed it up perfectly, saying “antitrust is really not about what people say. It really is about how markets work and what companies can do after a merger”.
Fed’s Strategy of Increasing Liquidity Survives for a Third Day (Bloomberg)
That little thing about the discount window notwithstanding, the Fed has yet to indicate a willingness to cut lending rates (although the market has certainly been predicting as such). At this point, the plan of attack is simply to increase liquidity, a different play than the one Greenspan & Co. ran when they faced a crisis. Of course, to make a distinction between cheap cash and plentiful cash is a bit disingenuous, seeing as the latter will certainly turn into the former given enough time.
Bonuses on Wall Street Threatened by Credit Crunch (Bloomberg)
Bonus season is a lot like Christmas — the fun, the disappointment, the anticipation, the jealousy and the fact that it seems to start earlier and earlier every year. We’ve already mentioned it a few times here, and now that Wall Street is acting so wildly, it only makes sense to discuss the effect on bonuses. It goes without saying that bonuses could be really skimpy at certain hedge funds, particularly ones that have been crushed by volatility. On the whole, some expect bonuses to be down 5% from last year, which would still make them pretty high. Anyway, few folks have any idea, so its best to wait until some anonymous, unverifiable memos start hitting our screen.
Stocks set to open higher (CNNMoney)
Breathe easy. As of 4:53 ET, stocks look set to open higher as yields on short-term bonds have finally edged back up, suggesting perhaps that the buying panic is over. Across Asia and Europe, markets put in a gain, although Japan finished in the red.
Ameritrade, E – Trade Discuss Merge (AP)
This wouldn’t quite be on the level of XM and Sirius, since there truly are no other satellite radio firms, but word is that TD Ameritrade and E-trade have been talking about a merger for several weeks. For the most part, these two services just sort of blend together in our mind, so we think it’s a good idea. Plus, they spend a ridiculous amount on advertising — most of it very lame — that they could probably cut back on in the event of a tie-up. There would still be competition like Schwab and, er, ScottTrade, but this would certainly represent significant consolidation.
Google Aims to Make YouTube Profitable With Ads (YouTube)
After spending $1.6 billion on it, we can see why Google would want to figure out a way to monetize YouTube. Sure, it gets a trickle of revenue here and there, but the big cash hasn’t been forthcoming. Today the company has announced plans to place advertising on some content. It should be pretty familiar to anyone that’s, say, ever watched an episode of Top Chef and noticed an ad on the bottom part of the screen for that dumb looking show about Paula Abdul. Except in YouTube’s case, you can click on that little ad and watch a full video ad right away. Not sure who’ll click, but if they make them compelling, perhaps it’ll make a few bucks.
Toll Brothers earnings plunge (CNNMoney)
Just like at every other homebuilder, earnings at Toll Brothers plunged in its recent quarter, for all of the usual reasons. However, the company still managed to turn a profit, which is no small accomplishment in this market. Back during the boom, when people used to discuss what might happen in a housing shakeout, Toll Brothers was always noted as a possible survivor, because they made houses for rich people (you know, golf course McMansions and hipster Williamsburg high rises). And of course, Rich people can always get a loan (well, except for Jim Cramer, who insists that he couldn’t).
Bloomberg says won’t run for president (Reuters)
Just in case you missed it, it would appear that Mayor Bloomberg will be finishing out the rest of his term. HIzzoner will remain Hizzoner and not Hizmajesty, or whatever honorific they use for the Presidency these days. If you think that news effects Wall Street, then that’s why we mentioned it.
good to hear that kids will still be using cardboard commonly known as topps cards for their bikes.
Wells Fargo Gorges on Mark-to-Make-Believe Gains: Jonathan Weil
2007-08-22 00:02 (New York)
Commentary by Jonathan Weil
Aug. 22 (Bloomberg) — There’s the kind of earnings
investors can take to the bank. And then there’s the kind the
bank can show to investors.
Word to Wells Fargo & Co. investors: Beware the second
kind.
Last quarter Wells Fargo reported record net income of
$2.28 billion, up 9 percent from a year earlier. Read the
footnotes to its latest quarterly report, though, and you will
see a new term in accounting lingo called “Level 3” gains.
Without these, the financial-services company’s earnings would
have declined.
So what are Level 3 gains? Pretty much whatever companies
want them to be.
You can thank the Financial Accounting Standards Board for
this. The board last September approved a new, three-level
hierarchy for measuring “fair values” of assets and
liabilities, under a pronouncement called FASB Statement No.
157, which Wells Fargo adopted in January.
Level 1 means the values come from quoted prices in active
markets. The balance-sheet changes then pass through the income
statement each quarter as gains or losses. Call this mark-to-
market.
Level 2 values are measured using “observable inputs,”
such as recent transaction prices for similar items, where
market quotes aren’t available. Call this mark-to-model.
Then there’s Level 3. Under Statement 157, this means fair
value is measured using “unobservable inputs.” While companies
can’t actually see the changes in the fair values of their
assets and liabilities, they’re allowed to book them through
earnings anyway, based on their own subjective assumptions. Call
this mark-to-make-believe.
Antennae Up
“If you see a big chunk of earnings coming from
revaluations involving Level 3 inputs, your antennae should go
up,” says Jack Ciesielski, publisher of the Analyst’s
Accounting Observer research service in Baltimore. “It’s akin
to voodoo.”
For San Francisco-based Wells Fargo, whose stock is up 5
percent this year at $37.37, last quarter was a veritable mark-
to-make-believe feast.
About $1.21 billion, or 35 percent, of its $3.44 billion in
pretax income came from Level 3 net gains on the $18.73 billion
portfolio of residential mortgage-servicing rights that Wells
Fargo marks at fair value. These assets, known as MSRs, consist
of rights to collect fees from third parties in exchange for
keeping mortgages current, by doing things like collecting and
forwarding monthly payments.
Wells Fargo’s July 17 earnings release didn’t mention Level
3 items. This isn’t how the second-largest U.S. home lender
wants investors to parse its earnings either.
Hurting Earnings
Instead it stresses a metric called “market-related
valuation changes to MSRs, net of hedge results,” which was
minus $225 million last quarter. Spun this way, it looks like
changes in the servicing rights’ values actually hurt earnings.
To get that figure, the company first broke the $1.21
billion of net gains on MSRs into two parts.
Part one was $2.01 billion of gains “due to changes in
valuation model inputs or assumptions.” Part two was $808
million of fair-value declines from changes related to the
servicing rights’ expected cash flows over time. (All figures
are rounded.)
Next, Wells Fargo took the first part — the $2.01 billion
in gains — and netted it against $2.24 billion in fair-value
losses on certain “free-standing derivatives.” The company
says it uses these derivatives as “economic hedges” against
changes in MSR values, although they don’t qualify for hedge
accounting under the accounting board’s rules.
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.
In an e-mail, Wells Fargo spokeswoman Janis Smith Appleton
said “it would be inaccurate to characterize one component of
our servicing revenue for the quarter in relation to our total
results.” She said that’s “because it would ignore the
effect” rising interest rates had “on both the increase in
fair value of our residential MSRs as well as the corresponding
net derivative losses associated with the economic hedges of our
MSRs.”
Real Stretch
Inaccurate? No. The real stretch is calling these
derivatives hedges.
Nobody forced Wells Fargo to start running quarterly fair-
value changes for MSRs through its income statement. The
accounting standard that let it do so, called Statement 156,
gave it a choice.
SunTrust Banks Inc., by comparison, elected not to. Why?
“In my mind there is no effective hedging strategy out there
that captures all those risks that would move in offsetting
directions to MSR,” says Tom Panther, SunTrust’s chief
accounting officer. So, SunTrust waits until the servicing
rights are sold before recognizing any pent-up gains.
MSR values normally rise when interest rates do, because
fewer customers refinance and prepay their mortgages. At some
point if rates rise too high, though, delinquencies on
adjustable-rate mortgages could soar, as customers’ rates reset,
pushing MSR values down.
With mortgage markets now crashing, SunTrust looks like it
made the more prudent choice. Yet in the lunch buffet of
generally accepted accounting principles, both companies’
approaches are permitted.
Someday, Wells Fargo investors may regret this.
(Jonathan Weil is a Bloomberg News columnist. The opinions
expressed are his own. Click on {LETT } to comment on this
column and write a letter to the editor.)
Did someone say Enron accounting?
think the post about Sr. Bloomie needs some editing.
You should have included the Billy Ripken card (even if its a Fleer card). See Wikipedial: http://en.wikipedia.org/wiki/Billy_Ripken