Kudos to my Foolish colleague Alex Dumortier for essentially calling Wells Fargo's (NYSE:WFC) quarterly results perfectly earlier this week. As Alex warned:

I think that we have yet to see Wells Fargo bear the real toll of the housing crisis. There are reasons to believe the bank has put off taking its medicine over the last couple of quarters. If that is the case, the reckoning will only be more painful, and it could come as early as this Wednesday, when the bank releases its fourth quarter results.

Sure enough, Wells Fargo didn't even come close to meeting expectations, swinging to a fourth-quarter loss of $2.55 billion, or $0.79 per share, after building loan-loss reserves (or as Wells cleverly put it, "de-risking") by $5.6 billion. Analysts had been looking for a profit of $0.33 per share. The results also included a $294 million charge related to everyone's favorite swindler, Bernie "take the money and run" Madoff.

Earnings might be slightly skewed, since they don't reflect the Wachovia acquisition. For the quarter, Wachovia itself lost a staggering $11.2 billion. Now, that doesn't necessarily bode poorly for Wells Fargo; unlike Bank of America's (NYSE:BAC) deal to purchase Merrill Lynch, it really didn't pay a dime for Wachovia, and it likely has more than enough capital from the first round of TARP injections to swallow the losses. Still, amid an economy that can't find a bottom, investors are justified to question how much value can be sucked out of these bottom-fishing acquisitions.

Back to the loan-loss provisions. Wells Fargo is dealing with both asset deterioration and a game of catch-up to cushion against future losses. In the past year, here's how the two progressed:

Metric

Q4 2008

Q4 2007

Net charge-offs

2.69%

1.28%

Allowance for losses/nonperforming loans

319%

206%

This isn't necessarily bad news -- just a realization that Wells is hunkering down and preparing for the worst, bulking up a sizable war chest to handle the pain that lies ahead, especially since it has such a large presence in the free-falling California real estate market. That said, its 320% allowance/nonperforming ratio is the beefiest coverage of any major U.S. bank ... can you say margin of safety?

As I write this, shares are up more than 25% -- not what you'd expect from a company that missed earnings by a mile. What gives? For one, Wells didn't cut its dividend, which makes it one of only two major banks now paying out any noteworthy amount. (The other is JPMorgan Chase (NYSE:JPM).) The big question now is whether that dividend is sustainable. Given the feroicious rate of the banking industry's ongoing collapse, that might seem like wishful thinking.

Wells is one of the strongest banks around, if not the strongest. But be honest: That isn't a very dignified status these days. From an investment standpoint, I have a hard time wrapping my head around the attractiveness of being the best of the worst.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. Bank of America is a former Income Investor pick. The Motley Fool is investors writing for investors.