The Rush to Discount Intangibles

Ignorance and lack of thinking about intangibles drives me crazy. Here’s an example from Bloomberg about Wells Fargo which David Reilly contends here has “pumped up” its equity with “squishy” assets, in this case a mortgage-servicing right which:

…reflects the value today of future income from a bank’s right to collect and process payments on the mortgages it sells to investors. At issue is whether investors should look at this asset the same way they do other, more tangible, assets such as cash, loans and bond holdings.

They probably shouldn’t. While that would make today’s strained balance sheets look even worse, especially at Wells, it would give investors a more realistic view of their true financial strength…

The problem is that the value of servicing rights is more difficult to estimate, let alone depend on, in today’s tumultuous markets and economy. That has ladled uncertainty onto what is usually a pretty steady business.

Sounds very sound on the surface right? Except that the uncertainty affecting intangibles such as these (which are assets with an income stream attached) is not greater than the uncertainty surrounding the value of loans and bonds. Just because you consider something “tangible” does not make it more “valuable” than  an intangibles. It is lazy thinking to use these labels to evaluate assets. Intangibles are far more important in many businesses today than tangibles. Get used to it. Learn to get below the surface of labels and think about the true underlying risks.

Merger Blogging

Wells Fargo and Wachovia started a merger blog at the first of the year. They are doing a good job of it, mixing history with practical announcements. The tone is genuine and newsy. They seem to be getting readership judging from the number of comments.

Based on all the bad things that often happen during integrations, this will be an exciting effort to watch. You wonder if they are doing a similar effort internally. In the intangible economy, your customers and your employees are more important than ever–and this kind of communication is a good strategy.