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Wells Fargo may need to shore up finances

Regulators have told Wells Fargo & Co. to shore up its finances after government "stress tests" showed the bank would have trouble surviving a deeper recession.
/ Source: The Associated Press

Regulators have told Wells Fargo & Co. it may need to shore up its finances after government “stress tests” showed the bank would have trouble surviving a deeper recession.

Wells Fargo is one of several banks that regulators said would need larger buffers to protect them against possible future losses, according to two people familiar with the matter who spoke on condition of anonymity because of the sensitivity of the process.

The initial stress test results were revealed to the banks last month. Wells Fargo has until Tuesday to convince officials the results were mistaken and that the bank does not need to adjust its finances.

Wells Fargo spokeswoman Julia Tunis Bernard declined to comment.

After originally being scheduled for release Monday, the results of the government’s stress tests now are expected Thursday afternoon. The delay comes amid aggressive lobbying from banks that were told they would need to boost their capital positions.

The stress tests of the 19 largest financial firms are a centerpiece of the Obama administration’s plan to stabilize the banks. The tests estimate losses the banks would face in a “what-if” scenario that includes 10.3 percent unemployment and a 22 percent drop in home prices during the next two years.

If the test showed that dismal economy would push a bank below a minimum level of capital, regulators asked the bank to find a way to boost its finances.

One way to do that would be to convert preferred shares held by the government or other lenders into common stock. That would help the Treasury avoid returning to Congress for more bailout money, but it would dilute the value of common shares and put taxpayer dollars at greater risk.

Banks also could be given six months to raise money from private investors. If that doesn’t work, the government could give them additional money from the $700 billion financial system bailout.

The government will brief banks Tuesday on its final decisions about their appeals.

Regulators have said they will not allow any of the 19 firms to fail because it would be too dangerous for the rest of the financial system.

Wells Fargo holds billions of dollars in mortgage, construction and credit card loans. The stress test treated those loans as especially vulnerable since borrowers would face trouble repaying their debts in a much worse economy.

Analysts expect regional banks that were stress tested also may be told to raise capital, since their holdings are similarly tilted toward loans. Cleveland-based KeyCorp and Cincinnati-based Fifth Third Financial Corp. are among the banks in this situation.

Bank of America Corp. and Citigroup Inc. also have been disputing preliminary findings that they needed to boost capital, sources have told The Associated Press.

Spokesmen for New York-based Citigroup and Charlotte, N.C.-based Bank of America would not comment on whether the banks had been asked to raise more capital.

But Bank of America spokesman Scott Silvestri called a news report that it plans to raise $10 billion “completely inaccurate.” Bank of America has not been given a final figure from the Federal Reserve, he said.

Andrew Marquardt, a bank analyst at Fox-Pitt Kelton, said Wells Fargo’s capital risk is fairly minimal.

“If indeed they need additional capital, it’s going to be a fairly modest amount and fairly insignificant in terms of dilution,” he said. “I think their earnings power is far greater than most in the industry.”

Marquardt said one reason for that strength is that Wells Fargo already has marked down 60 percent of the lifetime losses on its loan portfolio.

Billionaire investor Warren Buffett, whose company Berkshire Hathaway owns about 6.85 percent of Wells Fargo’s shares, said he doesn’t believe the bank needs additional capital.

Besides Wells Fargo, Berkshire owns shares of three other banks the government subjected to stress tests: US Bancorp, SunTrust Banks Inc. and Bank of America.

“I can tell you that US Bancorp and Wells Fargo are extremely strong banks,” Buffett said Monday in an interview with CNBC. “They have terrific earning power, and earning power is enormously important in what happens to a business in the future. And you couldn’t have two better banks virtually positioned than those two for future earnings.”

But Buffett said the stress test results might not fully reflect the banks’ strength. A company with low production costs but lots of debt might survive a recession but flunk the test, while a company with high production costs and no debt might ace the test but could not survive price declines, he said.

Buffett said Wells Fargo has the lowest cost of production of any of the big banks.