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Buffett's Buyout Business Is a Risk for Wells Fargo (Update 1)

Even prior to Moody's latest opinions on Wells Fargo, many on Wall Street can't help notice the bank's ascent in activities once dominated by standalone investment banks such as Goldman Sachs (GS - Get Report) and Morgan Stanley (MS - Get Report) and industry conglomerates like JPMorgan, Citigroup (C) and Bank of America Merrill Lynch (BAC).

As other investment banks have scaled back operations and struggled to increase revenue since the financial crisis, Wells Fargo has consistently been able to grow its investment banking unit, which is part of a larger wholesale banking operation that also includes businesses ranging from corporate banking to insurance.

In 2012, Wells Fargo cracked the top 10 on Wall Street in underwriting high-yield bonds, according to data provider Dealogic. It's also the 10th leading player in providing financing to financial institutions. In those parts of Wall Street, Wells Fargo competed with big, but beleaguered, titans like Morgan Stanley and UBS (UBS).

In the U.S., Wells Fargo's underwriting prowess often beats European conglomerates as large as Deutsche Bank (DB) and Credit Suisse (UBS).

Wells Fargo falls farther down the list in the white-glove work of providing advice to corporations and financial institutions on mergers, running only in competition with boutique advisory firms.

In late 2011, the bank's faster-than-trend growth in some Wall Street areas drew the interest of research analysts.

Still, Wells Fargo CFO Tim Sloan told TheStreet in a December 2011 interview that the bank remains focused on its traditional lending businesses, even if growth rates in wholesale banking surprise some.

Since 2011, Wells Fargo has consistently gained market share in the recovering mortgage market.

Wells Fargo's financing mandate on Berkshire's recent deals provides anecdotal evidence of the benefits of having Buffett as a top shareholder. [In the fourth quarter Berkshire added to an 8% plus holding of Wells Fargo's shares, according to SEC filings].

To be seen is whether Wells Fargo's work in Berkshire Hathaway's acquisition of Heinz gives the bank reason to scale Wall Street businesses such as debt-trading and hedge-fund services. It's also unclear whether Moody's will act on its threats.

Currently, the agency holds a 'negative' outlook on Wells Fargo's A2 bond rating, which is higher than other large cap banking peers.

-- Written by Antoine Gara in New York

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