Wells Fargo (NYSE:WFC), in an extraordinary and arrogant practice, has decided they don’t have to reserve against any potential losses for off balance sheet (OBS) exposures because the taxpayers will bail them out if the loans go bad.

Of course it’s not presented in that light, but that is the bottom line.

Here’s how Chris Whalen at Zero Hedge reported it:

“In the case of WFC, the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB rule change. ‘… Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?’

“Thus WFC is basically saying that none of the bank’s $1.1 trillion in conforming OBS exposures need to be represented or reserved against.  My problem with this is two-fold:  First, the FHA and/or GSEs will return some portion of the securitized loans, so WFC should explicitly disclose this cost and reserve against it.  Second, it seems to be pretty arrogant for WFC to take such an aggressive position with respect to these OBS vehicles, even with a third party guarantee, especially given the intent of the FASB rule change.  BTW, WFC has another $0.6 trillion in non-conforming exposures we have yet to hear about.  That is next quarter presumably.”

Don’t get confused by the inclusion of the FHA in the narrative, as that’s just another way of saying taxpayers’ dollars. Also concerning ‘coforming residential exposures’ mentioned above, a conforming loan is simply a loan that meets specific lending guidelines from various institutions sponsored by governement entities; for example, Freddie Mac (NYSE:FRE). Amounts for conforming loans were increased as part of the simulous bill in 2008.

Not only is this outrageous in outlook as it concerns the taxpayer, but it confirms that it’s really impossible to guage the health of a bank or financial institution when they can simply interpret and practice what they want within the evidently meaningless parameters of the FASB.

For Wells Fargo in particular, this is extraordinary in light of their $1.1 trillion in conforming OBS exposures.