Bank Runnings

Local SF banking icon Wells Fargo has failed its "stress test," and has been told to raise more capital:Wells Asked to Raise More Capital After Stress Test

Wells Fargo & Co. may be forced to raise additional capital to protect against possible future losses, after government stress tests reportedly suggested the San Francisco bank would struggle to survive a deeper downturn

The outcome raises fresh questions about the health of the company, which just two months ago was sending signals it wanted to repay $25 billion in federal bailout money ahead of schedule and two weeks ago reported record first quarter earnings.

Wells Fargo supporters put out a carefully worded statement reflecting hours of careful deliberation:

Securities analyst Richard Bove, who is sharply critical of the federal response to the financial crisis and the stress tests in particular, said Wells is in this position precisely because it did what the government asked: buying Wachovia as the company teetered on the brink of bankruptcy, thus preventing another major bank collapse last fall, and lending out increasing sums of money amid growing pressure on companies that accepted Troubled Asset Relief Program funds.

"They listened to the government, they did what they said, and now the government is stabbing them in the back," he said.

Warren Buffet, who is a major shareholder of Wells, says everything is cool:

"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."

The Original Sin of the Crash of '08 was the loosening of standards - accounting, regulatory, fiduciary - in many of our financial institutions. But, some like JP Morgan and Wells Fargo were doing just fine - not great, but fine - even in the wake of the crisis that has roiled Wall Street. And, the government - in an effort to prop up the imprudent - dragged in the prudent and saddled them with everyone else's problems. Now, SURPRISE! formally solid banks are themselves in need of rescue.

The government - in both the Bush and Obama administrations - claims it has acted to save and strengthen the financial system. But in doing so, it has undermined banks like Wells, first by inducing them to take TARP money and then by declaring that they have failed "stress tests."

The tests themselves have been roundly criticized as being a sham exercise designed to provide cover for further TARP disbursements. That may be, but it sure is hard to tell because there has been absolutely no transparency with these tests. Has anyone ever had a sense of what these tests involve and how they have been conducted? Oh, I know the pros all say they know what's going on. And the government's vast cadre of anonymous sources and back channel leakers has been busy supplying information.

How is the average depositor supposed to know whether or not this is all BS? He can't. He just has to take comfort from the fact that the government is on the case and looking out for him. Gulp. And the real danger is that the government is now taking positions on the state of Wells Fargo that are the opposite of that of people like Warren Buffet who, presumably, knows a thing or two about what's happening at Wells and what its future prospects are. But, because the stress test has the imprimatur of an Official Government Pronouncement, that will be enough to undermine Buffet as well. Whether or not it is actually based on an accurate view of Wells' business is almost beside the point.

Stop the bailout now, I'd like to get off.