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What does it mean that Wells Fargo is hanging on to its TARP funds?

Wells Fargo headquarters in San Francisco
REUTERS/Robert Galbraith
Wells Fargo’s headquarters in San Francisco.

U.S. Treasury Secretary Tim Geithner called it “an encouraging sign of financial repair” on Tuesday when his department cleared 10 major banks, including U.S. Bancorp, to pay back nearly $70 billion in taxpayer subsidies awarded in the fall.

Wells Fargo found itself in unflattering company, lumped in with Citigroup and Bank of America as one of only three major banks not on the Treasury Department’s list. The bank later said in a statement that it has not yet applied to repay the $25 billion government investment, received through the Troubled Asset Relief Program.

“We want to pay back the government’s investment on behalf of the U.S. taxpayer at the earliest practical date, but we haven’t applied yet to our regulators to repay the investment,” the company said. “Our priority right now is to integrate Wachovia into Wells Fargo as smoothly and efficiently as possible to benefit our 70 million customers. We’ve used the government’s capital investment to continue lending to creditworthy customers — more than nine times the amount of the government’s investment. … We will work closely with our regulators to determine the appropriate time to repay the TARP funds while maintaining strong capital levels.”

Restrictions include limit on bonuses
The bank’s continued use of taxpayer money means it will have to keep putting up with the strings attached to it, too, such as a limit on bonuses to its top 25 employees. Wells Fargo chairman Richard Kovacevich famously fumed about the restrictions in March, saying it was un-American to retroactively add conditions to accepting the funds.

But does continued use of federal subsidies signal anything new about the bank’s financial condition?

Probably not, banking experts say. Analysts, investors and regulators knew from the beginning that Wells Fargo was taking on some extremely toxic assets when it acquired the sinking Wachovia Corp. last October. The fact that Wells Fargo hasn’t tried to buy back shares it sold the government last fall probably says as much about its conservative style of management as it does about the company’s financial health.

Subprime mortgage losses had pushed Wachovia to the brink of collapse by the time Wells Fargo acquired it on Oct. 3 for about $15 billion. Just a few days earlier, Wachovia had experience a run on deposits, with customers withdrawing $5 billion in a single day — about 1 percent of the bank’s total deposits.

TARP program may have helped decision
And in the previous quarter, Wachovia posted a $8.9 billion loss. One factor that might have loosened Wells’ wallet was emerging details about the TARP funds, Karen Grandstrand, chair of the bank and finance group at Frederikson & Byron, told MinnPost at the time.

Later that month, on Oct. 29, Wells Fargo announced that it was selling 25,000 shares of preferred stock to the Treasury Department for $25 billion. The bank’s CFO, Howard Atkins, praised the program as “a positive step toward providing much-needed capital for financial institutions,” and said Wells would use the money to continue lending “in the spirit of the Treasury’s plan.” It’s done that more than other big rivals — increasing loans in the fourth quarter by $9.7 billion, while others scaled back lending.

The Treasury Department invested a total of $199 billion in more than 600 banks across the country through the program. The department said Tuesday that combined with previous repayments it will have received about $70 billion of that back already. In Minnesota, TCF received permission in April to buy back $361 million in TARP funds. U.S. Bancorp got permission Tuesday to buy back $6.6 billion in shares.

Wells Fargo is probably doing the “prudent thing” by not racing to follow TCF, US Bank and others out of the program when it may still need the money, said Raj Date, chairman and director of the Cambridge Winter Center for Financial Institutions Policy, a nonprofit think tank.

“Given the well-known conservatism of that management team, I would suspect they’d like a better perspective on the medium-term unemployment and home price outlook before eliminating what is, after all, relatively inexpensive taxpayer-supplied capital,” Date said.

Substantial exposure in real estate
Besides the “astonishingly bad” credit portfolio it inherited from Wachovia, Wells Fargo also has substantial exposure in residential and commercial real estate, especially in California. “[T]he range of potential outcomes for Wells through 2011 is quite wide,” Date said.

Adequately preparing for that wide range of outcomes will require Wells Fargo to put a bigger buffer in place against potential losses, the Treasury Department told it last month. The bank was one of four large banks ordered to increase their reserves based on results of its so-called “stress tests,” which modeled what would happen to the banks’ books during a hypothetical deepening recession. Wells Fargo was told to raise $15 billion.

Wells Fargo’s absence from this week’s Treasury Department list “suggests that it still needs the government’s capital,” said Prof. Andrew Winton, chair of the Carlson School of Management’s finance department. Since it is not asking out of the program, “it must feel that it cannot reduce its current capital level and it would face some difficulty going to the market to replace the government’s capital.”

The bank raised $7.5 billion in private capital in early May, but will need to raise more in the next six months to meet the stress test standards.

Wells Fargo is likely to face higher additional losses going forward than JP Morgan, Goldman Sachs and other banks on the Treasury’s all-clear list, Winton said. However, the company’s financial condition is not nearly as bad as that of Bank of America or Citigroup. (Bank of America was ordered to raise an extra $34 billion in reserves, more than twice Wells Fargo’s amount.) “I don’t think the public should take this as a sign that Wells Fargo is in trouble,” Winton said.

If anything, Date said, the fact that Wells Fargo is hanging onto its TARP funds is actually good news for customers. Equity, government or private, acts as a buffer that protects creditors and depositors.

“Wells depositors should want the company to carefully husband capital.”

Dan Haugen writes about business and the economy.

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Comments (1)

  1. Submitted by Richard Schulze on 06/11/2009 - 09:31 pm.

    I’m going to wait till the tax credit goes up to 25k to buy my house….

    No wait, that’s not right….

    I’ll wait till the tax credit is a house…..


    I’m sure that the offer will be:
    Buy a home and finance it at a TARP bank,
    and get a free mid-size GM car.

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