Wells Fargo Goes Off the Cliff

Bankers are lemmings. If there is anything that terrifies them, it's standing apart from the crowd; once Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) announced that they were repaying the government's TARP investments, it was only matter of time before Wells Fargo (NYSE: WFC  ) did the same. In order to fund this repayment, Wells has already priced a $10.65 billion equity offering at $25 a share. After all the equity raisings and asset shuffling, here is how the capital ratio league table for major commercial banks now stands:

Company Name

Tier 1 Common Equity Ratio %
(Sept. 30, 2009)

Citigroup (NYSE: C  ) -- Pro forma

9.0

Bank of America (NYSE: BAC  ) -- Pro forma

8.5

JPMorgan Chase (NYSE: JPM  )

8.2

US Bancorp (NYSE: USB  )

6.8

Wells Fargo (NYSE: WFC  ) -- Pro forma

6.2

PNC Financial Services (NYSE: PNC  )

5.5

Source: Bank of America presentation, company press releases.

To jump or not to jump?
Let's be fair to Wells, its instincts are less lemming-like than most of its peers, so was repaying TARP now a smart decision? (To show rodents the same fairness as bankers, readers should know that lemmings' mass suicide is a myth fostered by a 1958 Disney documentary).

In my judgment, Wells' equity raising was overdue -- the market has been favorable, and the California lender was significantly below its peers in terms of its Tier 1 common equity ratio (it remains at the low end of the range). As far as repaying TARP, I'm not convinced Wells should do so immediately; on the other hand, it's more rational on their part than on that of B of A or Citi, since they were never in the same kind of predicament. That Wells should have felt pressure to repay TARP because its two weaker competitors beat them to the post -- instead of the opposite -- is another bizarre twist in this crisis.

One good TARP deserves another
As the last of the major banks to announce its repayment of TARP, Wells Fargo is closing a chapter of the credit crisis, but who's to say that it won't necessitate a rewrite? I think there is a small -- but non-zero -- probability that one of the major banks will have to go back hat in hand to the government in 2010 to ask for another dollop of "extraordinary" assistance. Even if that doesn't happen, I can think of a number of other possible catalysts (commercial real estate, sovereign debt crisis, etc.) that could trigger a correction in the shares of weak financials next year. Buyer beware!

The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.

If you're concerned about the threat of inflation, focus on companies with sustainable dividend growth. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks with robust dividend yield. To find out their six 'Buy First' stocks, take advantage of a 30-day free trial today.

Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2009, at 11:18 AM, hardrive118 wrote:

    WFC shouldn't have done it. i don't think WFC's customer's would switch banks when if they found out that Wells was the last bank to repay TARP. they got the earnings power to meet any future loses. with the dividend cut early this year, they maybe need 3 or 4 quarters worth of earnings to pay back TARP. that would have been more shareholder friendly.

  • Report this Comment On December 18, 2009, at 11:19 AM, hardrive118 wrote:

    WFC shouldn't have done it. i don't think WFC's customer's would switch banks when if they found out that Wells was the last bank to repay TARP. they got the earnings power to meet any future loses. with the dividend cut early this year, they maybe need 3 or 4 quarters worth of earnings to pay back TARP. that would have been more shareholder friendly.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1067453, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:06:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement