Industry News: Why is Wells Fargo’s (NYSE:WFC) Tier 1 Capital-asset Ratio the Taxpayers’ Problem?

November 11th, 2009 • Related • Filed Under • by Gary

It didn’t bother Wells Fargo (NYSE:WFC), which Warren Buffett’s holding company Berkshire Hathaway (NYSE:BRK-A) has a major stake in, to accept taxpayer funds in order to secure capital when credit was tight, so why does the company even further their use of the funds of taxpayers by making it’s own rules on when to pay them back?

The challenge faced by Wells Fargo is their Tier 1 capital-asset ratio, which would take a hit if they were required to raise funding to pay back taxpayers. This would come about from the dilution of the value of its stock.

It didn’t bother Warren Buffett to grab money from taxpayers to get his share of the bailout funds for Wells Fargo (something he openly advocated and backed). So now he wants to keep the value of Wells Fargo stock shares up and pay back the money on their own schedule.

At this point, Wells Fargo is thinking on paying back the $25 billion in bailout funds by doing it over a period of several years, by paying it back through a portion of the profits generated during that time. Assuming that’s their decision, it would be a negative move in that every year the bank would have to pay back a preferred dividend to the U.S. government.

The concern of Wells Fargo comes from the consequences of paying back the bailout immediately, which would result in the company looking riskier in contrast to their major competitors. But like I said in the title of this article: How is the Wells Fargo Tier 1 Capital-asset Ratio the taxpayers’ problem? The answer is of course – it isn’t.

Much of this concern centers around shareholder value of those owning stock in Wells Fargo, which will be pressured no matter which direction the company takes; the consequences of taking money from taxpayers in the first place.

As usual, it’s the taxpayers being seen as the last people to be concerned with over being paid back their funds. While there are a number of things Wells Fargo could do, and various theories being thrown around as how to do it, I don’t want to dilute this article’s message by going in that direction.

Anyone reading my articles know that I don’t support the government bailouts of the banking industry, or any industry at all. But while believing that, we still, unfortunately, have to deal with the fallout of those bailouts and how to unwind the funds the banks owe us.

Having said that, the shareholders of Wells Fargo shouldn’t be the determining factor in when and how taxpayers should be paid back their money, neither is the Tier 1 Capital-asset Ratio of Wells Fargo or its dilution of stock shares our problem. If shareholders of Wells Fargo didn’t want this to be a problem, they should have opposed the robbing of taxpayers’ funds to start with. Now that they have those funds through the company, now they want to be able to pay them back how and when they want based on their shares possibly being diluted and Wells Fargo looking like a riskier company to invest or stay invested in than their rivals. They should of thought of this before they decided to tap the public well.

hfsense

So I kinda agree with the main points in the "pro-Wells" camp cited here. a) they did not want the money; b) they acquired Wachovia with no loss-sharing agreement; c) they have extended loans to small business and mortgage loans.

BUT... the simple fact is a 10% equity raise will allow them to have the best of both worlds. Just do it and end the govt involvement. In the worst case, WFC shares go up, up, up and you wish you had more leverage and less dilution. So what. Back to business. Get the government out. Its so easy.

alexander

Who is this "Gary" who wrote this article? You obviously have no knowledge of Wells Fargo. As was previously mentioned, Wells Fargo (along with JP Morgan) was forced to take this money by the government in a vain attempt to hide just how weak Bank of America and Citigroup were. The interest Wells pays on this "bailout" is already costing stockholders more than enough. I don't blame you for not posting your last name (like any competent person writing an article would), as it's obvious you no little to nothing about the banking industry.

Nick

All I need to know is why JPMorgan Chase has paid back TARP and Wells Fargo has not. I already know the answer and so does everyone else. It still doesn't change the fact that JPMorgan Chase has paid TARP back and Wells just hasn't.

praediummaven

Nick, If you knew the answer than you would know JPM is the culprit here. They have a loss sharing agreement with the FDIC on assets they picked up, whereas WFC did no such thing when they acquired Wachovia. Wells may "appear weak now, but the taxpayer will lose more money from JPM's loss sharing agreement in the long run. Get the facts man!

Ed

The impression has been encouraged that this was some kind of "gift" from the taxpayers. Prior to the generous "gift" at 5% Wells Fargo could have raised the money (had they wanted, or needed it) without any government assistance.

caleb

You are right on the money danlj - Isn't American Banking News embarrased to have a columnist so ill informed about the largest banking crisis in 70 years?

Nick

It is Wells Fargo that should be embarassed from coming out so vehemently opposed to TARP, then failing to pay it back when allowed to do so, as JPMorgan Chase has already done.

danlj

This is too funny. I just had to respond. From your first paragraph:

>It didn’t bother Wells Fargo (NYSE:WFC) ... to accept taxpayer funds in order to secure capital

Um, actually, Wells was very strongly against the government investment- in fact, it has been reported widely that Kovacevich, Chairman, was furious when he was told that he had to accept the $25B dollar investment. Just do a google search for "Kovacevich furious".

>so why does the company even further their use of the funds of taxpayers by making it’s own rules on when to pay them back?

This is simply an absurd statement. Do you not realize that the government (and public) was very vocal in urging the bank to LEND OUT the money to consumers and small business who needed the money. In response, Wells has extended more loans to small businesses than any other bank in the country. They have helped huge numbers of mortgage holders adjust their payments and, thus, now have one of the lowest foreclosure rates of the major banks.

Needless to say, that first paragraph (and most of the rest in my opinion) is about misleading as can be imagined. This belongs on 'The Onion'!

Nick

Wells may have extended more loans to small businesses (BofA is then a marginally close 2nd) but Wells has the 2nd lowest Mod rate of the big banks. They can't modifiy all those Wachovia loans because they cannot afford to do so without running into major capital issues.

So all of you Wells employees: Face it, your company is in trouble. It is still solid and I am positive it will recover, too.

Nick

If Wells was strong opposed to the investment, why not return it as JPMorgan Chase did? It is probably because they cannot afford to pay it back without facing major capital issues.

Nick

I have reread your post. Again, if Wells is still so against the program, why aren't they exiting the program? They can't.

Yes I know they bought Wachovia out right- I respect that.

But they can't have it both ways. Wells is going through a difficult time which it will definitely recover from. But the fact is, Wells has made some mistakes.