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WFB’s Stumpf in Serious Situation

Can Wells Fargo pay back its TARP funds?

Much has been heard about Wells Fargo’s compelled acceptance of its Troubled Asset Relief Program (TARP) funds. While its competitors have already managed to repay the government after raising capital in a myriad of ways, the bank has yet to decide on how it can get out of government support. Company spokeswoman Richele Messick sent an email to TheStreet.com that states, “We intend to pay back the government’s investment in Wells Fargo on behalf of U.S. taxpayers in a shareholder-friendly way. We will work closely with our regulators to determine the appropriate time to repay the funds while maintaining strong capital levels.”

WFB’s head, John Stumpf, wants to pay back the TARP “shortly” but he’s also pressured by the consequences of this action because he’s keeping his shareholders’ trust. This “shareholder-friendly way” was best explained by Breakingviews.com’s Anthony Currie. He writes, “The Wells boss may have considered paying the government quickly in cash. After all, the bank did raise $21.2 bn issuing common equity as the financial crisis unfolded. But it’s not clear regulators would be satisfied with that. More importantly, parting with much cash would deplete the bank’s capital… Paying back TARP would extinguish $1.25bn a year in post-tax dividends, freeing up earnings for shareholders.”

Here are two things that we expect from this.

First, the bank could probably be paying the TARP by 2Q10 and it would just be in the form of dividend payments yet. It hasn’t recovered from its exposure in the California real estate bubble today as evidenced by its quarterly earnings.

Second, it would take long to pay for the entire TARP fund. Its takeover of Wachovia is still a contented issue. It took a lot of capital to save the failed bank and its toxic properties are still tied to WFB. Still, there’s no clear indication of property market resurgence so the odds of “immediate” repayment is highly unlikely.

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