Monday, May 4, 2009

WSJ: Wells Fargo May Need Capital

Voltron says: Wells Fargo is worse off than I thought!


Wells, despite its emergence as one of the survivors of the U.S. banking crisis, may be among the most capital deficient, some analysts said Monday. Keefe, Bruyette & Woods said Wells may need as much as $50 billion; SNL Financial said Wells will need $66.3 billion if it wants to maintain a tangible common equity ratio of 3%. Tangible common equity is one measure of a bank's capital strength.

What worries some analysts is the risk Wells assumed with its recent purchase of troubled Charlotte, N.C.-based Wachovia Corp. Wells is now heavily exposed to commercial real estate, another weakening sector of the U.S. economy, and future earnings may come under pressure if Wells looks to reduce certain balance sheet items largely inherited from Wachovia, such as $6 billion in commercial mortgage securitizations and $137 billion of exposure to credit default swaps.

"Did they buy more of this risk than they anticipated?" said analyst Fred Cannon of Keefe, Bruyette & Woods.

Mr. Cannon, who predicts Wells will need $50 billion as a result of the stress test, said Wells could raise $25 billion by converting preferred shares held by the government into common stock. But he expects the bank instead to raise the money through "alternatives sources."

Investor Warren Buffett, a big Wells holder, is among those critical of the stress test process, saying on Sunday that regulators were judging loss expectations too broadly. He is among those who could take a financial hit if Wells is diluted by an infusion of tangible common equity.

"To the cynical mind, he is talking his books," Mr. Cannon said.

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