What Wells Fargo profits mean for economy

April 9, 2009 7:18:50 PM PDT
San Francisco-based Wells Fargo bank fueled a major rally on Wall Street Thursday by forecasting a record $3 billion first quarter profit.

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The Dow Jones industrial average rose nearly 250 points Thursday to close back above the 8,000 mark. And it ended a short trading week with the fifth consecutive weekly gain. /*Wells Fargo*/ stock rose 31 percent and took other banks along for the ride with /*Bank of America*/ and Chase*/ rising as well.

Wells Fargo's report that it expects first quarter earnings of $3 billion nearly doubled analysts' expectations. Just last quarter, the bank had a $2.6 billion loss related to buying Wachovia bank.

Wells Fargo credited an increase in mortgage applications, but Marketwatch reporter Alistair Barr says those big first quarter profits are also due to the way Wells Fargo handled the purchase of Wachovia last year.

"They wrote down a lot of Wachovia's bad assets right at that time so they took the pain and most of their lumps in the fourth quarter," Barr said. "So they get the benefit of all other types of earnings but without some of the losses on the assets that they wrote down before."

And market watchers say the upswing in bank stocks Thursday is due in part to short sellers reversing themselves and buying back into the market ahead the soon to be released government report on the health of the nation's banks.

"We've gone through now the period of the stress tests and we haven't had any leaks of bad news, in fact if we've had any kind of leaks at all, it's been a suggestion that maybe all the banks passed the test," Golden Gate University Dean /*Terry Connelly*/ said.

Connelly says there is no doubt the boom in refinancing helped Wells Fargo and the other banks.

At the White House Thursday, President Obama told homeowners it is time to take advantage of near record low mortgage rates.

"There are 7 to 9 million people across the country who, right now, could be taking advantage of lower mortgage rates; that is money in their pocket," Mr. Obama said.

With massive job losses, a housing crisis and evaporating retirement accounts, the economy has been in a freefall. But the presidents' economic advisor says that is coming to an end.

"We can be reasonably confident that that's going to end within the next few months and it'll no longer have that sense of free fall," Lawrence Summers said.

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