Wells Fargo: The Feds Got It Wrong

Editor's note: This article was originally published May 12.

Investors who are buying up Wells Fargo (WFC Quote) shares these days are arguably making one of the riskier gambles in big bank stocks, though the payoff looms large if they are correct.

Wells executives believe the government's stress test finding -- namely, that the bank needed to raise $13.7 billion in additional capital -- were far afield from reality.

According to Wells, regulators did not take into consideration just how far the company wrote down Wachovia's assets, and they severely underestimated Wells' ability to generate revenue. The company is encountering strong mortgage business, "booming" deposits, wide interest margins and investment-banking opportunities, all with a vastly shrunken dividend. Plus, Wells says, cost savings and synergies at Wachovia that were better than initially expected.

"The Fed's results differ considerably from our results ... and that was under a stress scenario," CEO John Stumpf asserted in a conference call on May 8 to discuss an equity offering in which Wells raised $2.6 billion more than the $6 billion that had been first targeted. "We feel very confident in our numbers. We've had a 20-year record here at Wells Fargo and if there's one thing we do know, it's revenue."

In short, says Stumpf, much of the capital Wells is required to produce will be "additive, if you will."

The boastful attitude of Stumpf and other managers like Chairman Dick Kovacevich, who called the stress tests "asinine," and CFO Howard Atkins, who has touted Wells Fargo's operational successes in a confident, but data-centric manner, have solidified confidence in the firm, which first appeared after an earth-shattering earnings report.

Positive analyst notes supported those initial gains, as did surprisingly strong results from other major banks like Bank of America (BAC Quote), JPMorgan Chase (JPM Quote), Citigroup (C Quote) and Goldman Sachs (GS Quote). Increasing signs of life in the left-for-dead economy and stress-test requirements that are less dilutive than some investors had feared have propelled Wells further, along with the rest of the market.