Thursday, November 19, 2009

Analyst: Wells Fargo Needs TARP Money More Than It Admit

Flow of news this morning makes me suspicious regarding who choses to publish what and when. I've commented before about the correlation between bad news and market moves (only after move was made - such news is published), and vice versa. It was 3 days ago when the business media was oh-so-optimistic. That being said, I'm not doubting the sincerity or honesty of the report.

First, consider todays comment on Zacks Profit from the Pros newsletter:
Don't believe most of the nonsense that was discussed in the investment media Wednesday. They always want to create a cause and effect relationship between that days economic news and the direction of the market.

So yes, both the Consumer Price Index [CPI] and Housing Starts reports came out Wednesday. Yet the substance of each had nothing to do with the market being in the red. So why were we in the red? Because it can't be in the green everyday as it has been of late. Until proven otherwise, the trend has been our friend for 7 months. The day to day gyrations and the stories that come with it are just fluff.

And with that, let's go to the bad news:
Wells Fargo Needs TARP Money More Than It Admits: Jonathan Weil
When it comes to giving the U.S. taxpayers their money back, it’s time for Wells Fargo & Co. to put up or shut up.

Ever since Wells accepted its $25 billion of federal bailout assistance last year, its bosses have been complaining that the San Francisco-based bank never needed the money, didn’t want it, and shouldn’t have been forced by the government to take it. They keep saying they want to pay it back, too.

During a Sept. 1 Bloomberg Television interview, Wells Chief Executive Officer John Stumpf said the bank planned to return the cash “shortly” and in a “shareholder-friendly way.” On Oct. 21, Chief Financial Officer Howard Atkins said the injection under the Troubled Asset Relief Program “has served its purpose, and it’s time to repay the money.”

Wells still hasn’t bought back the $25 billion of preferred shares it issued to the government, though. And I’ve got a pretty good idea why: It can’t afford to -- at least not without selling a lot more common stock first. The numbers tell it all.

Start with the bank’s tangible common equity, a bare-bones measure of net worth often used by investors for evaluating a bank’s financial strength and ability to cope with losses.

Tangible common amounts to a company’s shareholder equity, minus preferred stock, which is left out because it acts a lot like debt. Tangible common also excludes intangible assets such as goodwill, which is a bookkeeping entry left over from past acquisition sprees, and mortgage-servicing rights, which represent the estimated value of future income from collecting and processing loan payments.

Taking Account

Wells had about $37.4 billion of tangible common equity as of Sept. 30, by my math. Yet even that number is frothy, because it doesn’t take into account the fair-market values for most of the bank’s financial assets and liabilities, which the company discloses in the footnotes to its quarterly reports.

Factor in those adjustments, and Wells’s tangible common equity falls to $14.3 billion, or just 1.2 percent of the bank’s tangible assets. The main reason for the difference is that Wells said its loans as of Sept. 30 were worth $22.1 billion less than the carrying amount it showed on its balance sheet.

How can Wells repay its TARP money, when its capital cushion on a fair-value basis remains so thin? A Wells spokeswoman, Mary Eshet, responded to that question by saying: “We will work closely with our regulators to determine the appropriate time to repay TARP while maintaining strong capital levels.”

She added that “our capital position is improving,” which is true, even using the bank’s fair-value numbers. So far this year, Wells has raised $8.6 billion in a common-stock offering, reported a $4.9 billion increase in retained earnings, and slashed its common dividend.

Take it as it comes. New crash leg? Je ne sais pas.


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