Wells Fargo's Balancing Act

Wells Fargo ( WFC) will have more work to do than its rivals when potentially ugly assets banks have long kept sequestered are required to come onto their balance sheets.

Banks like Wells have used qualified special purpose entities, or QSPEs, for many years to reap benefits from both sides of the process of issuing and packaging debt. They collect fees from issuing all sorts of debt of varying quality, then securitize the assets and offload them into QSPEs. In those vehicles, banks continue to collect fees by servicing the debt without having to hold capital buffers against potential losses.

"If you could book the fees and didn't have to hold it on your balance sheet, you looked like a great earnings-power story," says Matthew Ko, a financial stock analyst at Profit Investment Management.

Ratio of Assets Off-Balance Sheet
vs. On-Balance Sheet
Source: The companies

However, the Financial Accounting Standards Board announced in June that financial companies will have to take all the off-balance sheet assets they hold in special vehicles, and put them back on their books in January. Evidence of troubles ahead has already emerged.

State Street ( STT) posted a $3.7 billion charge to bring asset-backed commercial paper onto its balance sheet in the second quarter. Bank of America ( BAC) forecast a hefty, yet-to-be-determined charge for credit card receivables ahead, which led Moody's Investors Service to put the company on ratings review Thursday.

The change could have a big impact for firms that have a larger swath of troubled assets hidden behind balance-sheet curtains, particularly Wells Fargo. The firm had more assets off-balance sheet than on -- $1.9 trillion vs. $1.29 trillion -- at the end of the first quarter. That's a ratio of 148%, up from 137% at the end of last year, as Wells' off-balance sheet assets and loss exposure increased.

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