Thanks for that Spekulatius.
I came across an article concerning Wells Fargo in the May 4 edition of FORTUNE (FORTUNE 500), written by Adam Lashinsky entitled 'Riders on the Storm'.
I believe it contains some revealing info, which I've highlighted.
I'd be interested to read the comments of others ....
"Wells (had just) offered to pay $15.4 billion for all of Wachovia - without any help from Washington. Or so they thought.
Two weeks later, on Oct. 13, Kovacevich (Chairman of the Well's Board) was sitting at a long conference table with eight other bank chiefs in Washington, listening to Treasury Secretary Hank Paulson tell them why they should take the government's money. Kovacevich says he protested, telling Paulson that compelling banks to accept TARP funds would lead to unintended consequences. It would erode confidence in the banking sector by making investors question the healthiest banks rather than instilling confidence in the neediest. Other industries undoubtedly would come to expect a bailout themselves. Still, Kovacevich took the money.
His displeasure leaked to the public, but what hasn't been reported is exactly how Paulson flipped the seasoned banker so quickly. In what an observer in the room describes as a "true Godfather moment," Paulson told all the assembled bankers, "Your regulator is sitting right there" - actually the industry's two biggest overlords were in attendance: John Dugan, comptroller of the currency, and FDIC chairwoman Sheila Bair - "and you're going to get a call tomorrow telling you you're undercapitalized and that you won't be able to raise money in the private markets."
For Kovacevich this broadside was the horse's head on his pillow. He and his bank were in an unfamiliar position of vulnerability. Wells had just agreed to buy Wachovia, a bank it had coveted for years, and it needed the government's approval - and, critically, the ability to raise money - to complete the deal.
Reflecting on the episode with righteous indignation, Kovacevich points out that each of his warnings to Paulson was later validated. Yet he turns sheepish in explaining his decision. "You want to do what your country and your regulators want," he says quietly in his office, decorated with miniature replicas of Wells Fargo's iconic stagecoaches. "There was no ambiguity," he says, as to what was expected of him.
As the autumn progressed, the markets had begun to lump Wells Fargo in with every other big bank, and justifiably so. Investors were concerned that Wachovia's problems were so severe that Wells had bitten off more than it could chew. Wells Fargo set out to raise equity to finance the deal, but potential investors wanted to know why, if the government had just injected $25 billion into Wells, it needed additional money to buy Wachovia. It was a good question.
Kovacevich says the bank's regulators specifically asked Wells to go ahead with the fundraising so that Wells would have a bigger capital cushion. At $12.6 billion, , Wells raised more money than any non-IPO on record, but less than the maximum $20 billion target it had set. The Wachovia deal closed on the last day of the year (for $12.5 billion, nearly $3 billion less than the original offer price), and Wells that day wrote down $37 billion of a $94 billion Wachovia loan portfolio.
The large write-down, a banking term referring to the reduction of the value of an asset, removed a significant amount of risk from Wells Fargo's balance sheet - but not enough for Wells' critics. The write-down had the effect of weakening what had become a key ratio investors had begun to watch called tangible common equity, or TCE. It measures a bank's capital cushion without giving it any credit for ephemeral assets like goodwill. As a result of the deal, Wells had a TCE ratio of 2.7%, less than the 3% that many banking investors consider a bare minimum for healthy banks.
As recently as October, Wells had claimed it didn't need additional capital. Yet here it was, a recipient of the government's money and still undercapitalized by one important measure. The new burden of TARP began to chafe in February, when word got out that Wells was hosting its annual "recognition event" for top-performing mortgage brokers in Las Vegas. A populist rage ensued at the boondoggle by a TARP recipient, and Wells promptly canceled the event.
CEO Stumpf wrote a defiant letter to employees, which Wells published as an ad in national newspapers, saying that the real victims of the controversy were the hospitality-industry workers of Las Vegas. If Wells hadn't been on the map before, its gestures of rebellion were starting to draw attention and curiosity: Just who are these cowboys?
By late February the heat grew more substantial. The Treasury Department announced it would conduct confidential stress tests of the country's 19 biggest banks to understand how well they could survive an even deeper recession. (Kovacevich earned headlines weeks later for his remarks calling the move "asinine" on the grounds that regulators routinely conduct stress tests at banks.) Suddenly no bank was considered safe. Wells shares briefly fell below $8 - from more than $40 in the fall - and after relatively healthy competitors J.P. Morgan, U.S. Bank, and PNC Financial all cut their dividends, Wells did too, by 85%." |
