Oct. 30 (Bloomberg) -- Often when people have near-death experiences, they resolve to change their ways. That's not the case with the folks running Wachovia Corp., which experienced the financial equivalent.

In their starry-eyed world, Wachovia's net assets still were worth $50 billion as of Sept. 30, according to the balance sheet the Charlotte, North Carolina-based bank released last week. Never mind that, on Oct. 2, Wachovia's board approved Wells Fargo & Co.'s offer to buy the company for $14.8 billion in stock, saving it from the clutches of Citigroup Inc. and the undertakers at the Federal Deposit Insurance Corp.

Taken literally, the timeline suggests two scenarios. Either Wells Fargo is getting about $35 billion of stuff for free. Or the value of Wachovia's equity plunged $35 billion during the first two days of October. Neither of those happened, of course.

The reality is that Wachovia's management, including Chief Executive Officer Robert Steel, still won't admit the company's balance sheet is a farce and has been for a long time. More worrisome, though, is that nobody with any authority is calling them on it, even today. That includes Wachovia's auditor, KPMG LLP, as well as the Securities and Exchange Commission and banking regulators such as the Federal Reserve and FDIC.

If those lapdogs won't stop Wachovia from conjuring up bogus asset values, it's only prudent to assume they're letting lots of other companies bake their books in less obvious ways. The banks know this, which helps explain why they're reluctant to lend to each other, and why the credit markets remain so tight.

Same Story

The story's the same at National City Corp., which is audited by Ernst & Young LLP. On Oct. 21, the day it released third-quarter results, the Cleveland-based bank said its shareholder equity on Sept. 30 was $17.2 billion. Then on Oct. 24, it said it would be sold to PNC Financial Services Group Inc. for about $5.2 billion in stock.

The way the accounting rules work, some assets must be carried on the balance sheet each quarter at fair value, a process known as marking to market. Other assets can be shown at historical cost, unless they're impaired, in which case they must be written down to reflect current reality. Most of the assets at Wachovia and National City are carried at cost.

The two banks would like you to believe the rules are to blame. There's almost always a difference between book value and market value, they say. The buyers just have a different view of the asset values than what the balance sheets show. That the sellers accepted the buyers' low offers is incidental.

Get a Better Deal

``Our balance sheet was not and does not purport to be a market-value balance sheet,'' National City's interim chief financial officer, Tom Richlovsky, told me. He pointed out that the PNC deal hasn't closed yet. Until that happens, he said National City ``has no basis or intent to change the value of its assets.''

A Wachovia spokeswoman, Christy Phillips-Brown, gave a similar explanation. ``Wachovia is required to report shareholder equity based on accounting principles that do not include the use of fair-value accounting for its entire balance sheet,'' she told me. ``Accordingly, Wachovia's allowance for loan losses is recorded only for losses incurred at the balance- sheet date. This would not reflect how a third party might value Wachovia on a fair-value basis.''

Nor would it seem to reflect that Wachovia agreed to Wells Fargo's price. If Wachovia and National City executives believe their balance sheets, they should seek better deals.

Goodbye Goodwill

The worst affront is Wachovia's claim that, as of Sept. 30, it still held $18.4 billion worth of the intangible asset known as goodwill, which is a few billion more than what Wells Fargo agreed to pay for the whole company.

Goodwill is the bookkeeping entry one company records on its balance sheet when it pays a premium price to buy another. We know Wachovia's goodwill is worthless because the company is selling itself for $35 billion less than its supposed book value. National City's $4.3 billion of goodwill -- which is almost as much as the company's sale price -- probably is worthless, too.

By telling us their goodwill is worth billions, Wachovia and National City just confirm that the rest of their numbers aren't credible either.

If these banks can't be compelled to get the easy confessions right, there's no telling what madness lies buried in the rest of the industry's books. And just when it seemed the banks have boundless leeway already in how they cook their numbers, they want more.

Last week a group of banking and insurance lobbyists, including the Financial Services Roundtable and the Mortgage Bankers Association, sent a letter to SEC Chairman Christopher Cox requesting ``an elaboration on the use of judgment in fair- value accounting.''

``We do not believe that management, preparers, auditors and investors understand what is expected of them, or whether and how the needed judgments can be exercised,'' they said.

Loosely translated, here's what they meant: The bosses want a free pass from the government to use ``judgment,'' so they can say without fear of liability that their companies' assets are worth much more than they are in real life.

The troubling part is they may have such a pass already.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: October 30, 2008 00:01 EDT