Wells Fargo Should Give Up Its TARP Fight

Wells Fargo's stock more than tripled from a low point of $7.80 in early March to close out the second quarter at $24.26. It has continued to climb, but at a much more moderate pace, hitting a recent high of $31.53 in mid-October, but slumping down to $26.03 as of Tuesday's close. Paying back TARP might be the jolt that Wells Fargo's stock needs, even if the price is held back initially by the size of the capital raise required.

Wells is quite good at generating earnings, but it also has a big book of bad loans that are eating away at that capital. Its Tier 1 ratios are among the lowest for big bank competitors like Bank of America(BAC), JPMorgan Chase(JPM), U.S. Bancorp(USB) and others.

Wells Fargo's key metric, risk-adjusted Tier 1 common capital, stood at 5.18% on Sept. 30. While earning $7.6 billion in net income, apart from preferred dividend payments, Wells has only brought the metric up 2.08 percentage points since the end of 2008. Wells would need to move it another 3.32 points higher to reach the level that Bank of America will have after its mammoth $45 billion TARP repayment -- also the level that one can assume regulators may be requiring.

Using a simple ratio, it would take another $12 billion in earnings, and perhaps more than a year's worth of time, to reach that 8.5% benchmark. Then Wells would need to raise enough additional capital to keep the metric that high AFTER repaying its $25 billion in TARP, along with however much the related warrants cost. There's also a $5 billion Wachovia-related debt it will need to pay Prudential Financial(PRU) at the beginning of 2010.