Wells Fargo: Please Dilute Shareholders and Repay TARP Now!

 |  Includes: AXP, BAC, C, JPM, WFC, XLF
by: Jacob Wolinsky

Since that fateful day late last year when Henry Paulson forced all the major banks to take capital infusions from the Government, every bank has been clamoring to get out of the Government's fangs. Wells Fargo (NYSE:WFC), considered by many the healthiest bank, was the recipient of one of the largest capital infusions from the government. In addition Wells Fargo was required to raise additional money after the stress test revealed that it was inadequately capitalized. Wells Fargo's top management including CEO John Stumpf have been claiming for almost a year now that they will repay TARP soon but "in a share-holder friendly way". Stumpf likely means that he wants to pay back the $25 billion TARP money without having to issue new shares and dilute shareholders.Stumpf probably expects a few more quarters of earnings, issuing new debt and possibly asset sales to raise capital to repay the Government.

However the pressure may be getting too great to hesitate for too long. Bank of America (NYSE:BAC) last week issued $19.3 billion worth of common stock in preparation to pay back over $45 billion in TARP money to the Government. This likely sent a shiver down Stumpf's spine. Bank of America is possibly the weakest bank in the country after Citigroup (NYSE:C). Bank of America had massive exposure to junky subprime loans especially after its purchase of Countrywide and Merrill Lynch. A few days later the pressure has grown even more. Soon after Bank of America announcement, Citigroup announced they wish to repay TARP by issuing $20 billion dollar in stock. If Citigroup, considered by many the weakest bank in the country, repays TARP, Wells Fargo will be the biggest bank left that has not repaid as of yet. If two banks which would have certainly collapsed without massive government intervention are repaying TARP, it is embarrassing for Wells Fargo, considered "one of the better banks," not to do so.

In a previous article of mine I predicted that Bank of America would be forced to raise equity to get out of TARP. Many people argued strongly that Bank of America would be able to pay back TARP from its strong earnings power without issuing new stock. However, Bank of America issued 19.3 billion in stock, close to the $25 billion I had predicted. Now this seems strange, why did Bank of America, which had a far higher Tier 1 common Capital than required by the stress test, need to raise additional stock? I think it seems that regardless of a bank's strength, the government is forcing them all to issue stock to get out of TARP. Even though the stress test required a tier 1 common capital of over 4%, Bank of America had a 7.3% ratio yet was required to raise capital to repay TARP. Citi also has a high tier 1 common capital ratio of 8.7% yet the government too is making them issue stock to repay tarp. My point is that is seems to be regardless of how well capitalized a bank is the government is forcing them to issue common equity before repaying TARP. Even banks that did not need to raise extra money as a result of the stress test such as Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), American Express (NYSE:AXP) etc. all issued common stock before they were allowed to repay TARP. Therefore it is extremely likely for Wells Fargo which did not have such a high Tier 1 Common capital to begin with to have to raise money before repaying the government.

The point I am trying to make is that the government will certainly force Wells Fargo to issue common stock if it wants to get out of TARP immediately. Stumpf is reluctant to take this action and dilute shareholders even though he is desperate to get out from what Jamie Dimon has described as a "scarlet letter." As a shareholder of Wells Fargo I think that Stumpf should not hesitate to do whatever he can to repay TARP immediately. After Citigroup repays TARP, Wells Fargo will be the largest bank that is still a TARP recipient. There will be tremendous pressure on the firm to modify loans, reduce bonuses and take other actions that may not be in the companies best interest, but resonate with the new and growing populist movement. With an atmosphere in the country where Goldman Sachs is presented as the devil and AIG employees were sent death threats, it makes sense for Wells Fargo to get out of the Government's control at nearly any cost.

Disclosure: WFC, GS, AXP.