Oct. 23 (Bloomberg) -- You have to wonder who the people running Regions Financial Corp. think they're kidding.

So far this year, the Birmingham, Alabama-based regional bank says it has earned $622.5 million, including $79.5 million of net income last quarter. In reality, Regions probably has lost billions. The bosses just won't admit it.

It all comes down to that pneumatic, intangible asset known as goodwill, which is about as valuable as the air in a paper sack. As of Sept. 30, according to Regions, the bank's goodwill was worth $11.5 billion, slightly more than the quarter before. That's about 59 percent of Regions' book value, and $4.1 billion more than what the stock market says the entire company is worth.

There is one scenario I can envision in which that goodwill figure would be justified. That would be if another big bank is offering right now to buy Regions for a huge premium. There's no reason for us to think that's happening, notwithstanding the Treasury Department's recent jawboning, encouraging U.S. banks to merge their way out of their problems.

Barring an undisclosed deal in the works, Regions executives would have to be nuts to believe that goodwill number. Maybe they think the rest of us are just stoned. A Regions spokesman, Tim Deighton, declined to comment. The bank's chief financial officer, Irene Esteves, didn't respond to my e- mails.

It's become standard fare for banks to insult the public's intelligence by publishing asset values that defy logic. Saying Regions' goodwill is worth $11.5 billion would be like a hen bragging that her unlaid egg weighs more than she does.

Matter of Trust

There's a bigger problem here, though. By sticking to that goodwill valuation, Regions executives might as well be telling us we can't trust a single number on their financial statements.

This is a lesson they should have learned already from Wachovia Corp. and Washington Mutual Inc. It wasn't until yesterday, long after its stock collapsed, that Wachovia finally began writing down some of the $14.9 billion of goodwill from its October 2006 acquisition of mortgage lender Golden West Financial Corp., near the housing bubble's peak.

Before then, the Golden West goodwill, all by itself, purportedly was worth more than Wells Fargo & Co.'s purchase price for all of Wachovia. Similarly, Washington Mutual for months was trading for less than the supposed value of its goodwill, until the thrift filed for bankruptcy last month.

Those companies might have stood a chance of surviving if they'd come clean about their asset values much sooner. Instead, they got carried off the field. Regions executives are playing the same dangerous game.

Housing's Peak

While goodwill isn't completely unsaleable, it can't be sold by itself. It's just the bookkeeping entry a company records when it pays a premium to buy another. Specifically, it's the difference between the purchase price and the fair value of the acquired company's net assets.

Most of Regions' goodwill dates to the company's November 2006 acquisition of Birmingham-based AmSouth Bancorp., the month after Wachovia bought Golden West. Regions allocated $6.6 billion of the $9.9 billion purchase price to goodwill. Regions' chief executive, C. Dowd Ritter, joined the company from AmSouth.

Regions shares closed yesterday at $10.73, down 55 percent this year. It now trades for 38 percent of the company's official book value. Irrational goodwill isn't the only thing weird about Regions' accounting, either.

As of Sept. 30, Regions had a $1.5 billion loan-loss allowance, equivalent to just 83 percent of its nonperforming assets, which were $1.8 billion. A year earlier, Regions' allowance was at 175 percent of nonperforming assets. A year before that, it was at 249 percent.

Keeping Up

Common sense tells you a bank's loan-loss allowance, in an economic decline, should be rising as a percentage of nonperforming assets. It's the reserve a lender sets up on its balance sheet in anticipation of bad loans. At Regions, the allowance hasn't kept up.

It's also of little comfort that Regions is the largest audit client of Ernst & Young LLP's Birmingham office. Back in 2003, that office's largest client had been HealthSouth Corp., which turned out to be a massive fraud.

There's something strange about this town, too. Jefferson County, home to Birmingham, is almost insolvent. Last week, county commissioners there defeated a proposal to file for bankruptcy. It was a close vote, though, 3-2.

Maybe things will turn out better for Regions investors. Otherwise, the taxpayers could get stuck with the bill -- again. We've had enough of this.

(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 23, 2008 00:02 EDT