Saturday, May 2, 2009

WSJ on Wells Fargo stress test

Excerpt: So where might the negative surprises come? A bank may have to raise far more common stock than the market is expecting. Wells Fargo has lower ratios than most peers, when looking at both Tier 1 capital and [Tangible Common Equity].

It also has a loan book heavily exposed to stressed housing markets. As a result, the government-projected losses could be bigger than the market's expecting. What's more, it only has a small amount of private preferreds -- around $6 billion compared with the government's $25 billion -- to convert to common.

Wells's stock is up a lot, so it could try issuing common shares to private investors if necessary. But if Wells Fargo is deemed to need more capital and markets don't play along, the government may need to convert its preferreds into a common equity stake.

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