Who's Right on Wells Fargo: Buffett or the Government?

The AP reported this afternoon that Wells Fargo (NYSE: WFC  ) will be required to raise additional capital, based on the results of the government's stress tests, citing two sources that are familiar with the process. I can't say I'm surprised -- last week I wrote, "it's highly probable that Wells Fargo and PNC will both be required to raise capital." What does this mean for investors?

What's the number?
The key question now is: "How much capital will they be required to raise?" The answer to that may determine the means with which they do so. Although the idea is unpalatable, Wells may be forced to consider a conversion of the government's preferred shares into common shares. Indeed, if the bank were asked to raise $25 billion, for instance, it's not clear that private investors have the appetite to put that up (admittedly, that figure is probably well in excess of what authorities will ultimately require). Either way, existing shareholders would face dilution.

In any case, we're getting ahead of ourselves. Wells Fargo (along with Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) ) will be negotiating hard with the government until stress test results are released publicly (expected Thursday afternoon). Their aim will be to convince authorities they are healthy and that they don't require additional capital -- or not as much as the government says.

The Oracle speaks out
Furthermore, Wells has a high-profile, highly credible defender in Warren Buffett, the CEO of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . During Berkshire's Annual Shareholder Meeting this weekend, Buffett commented: "I think I know their [Wells Fargo's] future, frankly, better than somebody that comes in to take a look," referring to the officials conducting the stress tests. He went on to say that Wells Fargo (along with U.S. Bancorp (NYSE: USB  ) and Goldman Sachs (NYSE: GS  ) ) have "lots of capital." Berkshire Hathaway is Wells Fargo's largest shareholder.

Is Buffett talking up his position? I've been a Buffett-watcher for a while, and I can't be sure, but it isn't in his habits. Who is more likely to be right -- the government or Buffett? Here, I have no hesitation in answering Buffett. The trouble is, the government's opinion is right de jure, and that could end up costing shareholders, Buffett included.

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Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Berkshire Hathaway is a Motley Fool Inside Value selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (18)

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  • Report this Comment On May 04, 2009, at 3:53 PM, catoismymotor wrote:

    Buffet wants to cover is assets. The Obama administration wants to nationalize the banks. This is like putting a humidifier and a dehumidifier in the same room and letting the two battle it out.

    Come to think of it that would be an event that would involve a lot of hot air and a closed door. Sounds like business as usual for the foreseeable future.

  • Report this Comment On May 04, 2009, at 5:11 PM, weiwentg wrote:

    Wells' capital position is thinner than I'd like. I know they're a relatively conservative bank, but they did buy themselves quite a bit of risk with Wachovia.

    On the other hand, reports are that Citi will be asked to raise about $10bn, and BoA more than that. I doubt Wells will need $10bn. It's not likely to need a whole lot of capital to pass the stress test.

    Absent the stress test, I think I would leave it to Wells to earn its way out of the mess. Of course, I'm not running the stress test.

  • Report this Comment On May 04, 2009, at 10:55 PM, TxTom wrote:

    Yes, Wells Fargo did take on a lot with Wachovia. But what doesn't kill them will make them stronger, and my opinion is that Wells won't even catch a cold. WFC will emerge from all this a lot more profitable than before. Buffet knows this. He wouldn't stand up in front of a national TV audience and stake his word on it if he wasn't absolutely sure Wells will profit big-time. I have the stock. I'm keeping it until it surges ahead (not a bad day today even AFTER this revelation hit the airways). Buy WFC on any dip. Happy investing!

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