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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.