Wells Fargo Defends TARP Exit Plan

Wells Fargo on Tuesday defended its bailout exit strategy, as reports of competitor's plans made it appear weak in comparison and other market rumors slayed the market.
Publish date:

Updated from Tuesday, Sept. 1



) --

Wells Fargo

(WFC) - Get Report

repeated its bailout exit strategy on Tuesday, but appeared weak next to competitors that have already repaid taxpayer funds, or are moving forward with more definite plans to do so.

Its position comes at a delicate time, when rumors about the health of financial firms are circulating in the market. Traders have become more aggressive with bearish bets against Wells shares in particular in recent days.

Pressure was building on Wells, due to a report that competitor

Bank of America

(BAC) - Get Report

is moving forward with plans to pay back bailout funds. Wells CEO John Stumpf told


late in the day that the firm would like to pay back $25 billion in funds from the Troubled Asset Relief Program in the near future, but does not plan any capital raises to do so.

"We intend to pay back the government's investment in Wells Fargo on behalf of U.S. taxpayers in a shareholder-friendly way," spokeswoman Richele Messick told


in an email message earlier in the day. "We will work closely with our regulators to determine the appropriate time to repay the funds while maintaining strong capital levels."

Wells also has been assaulted by traders making bearish bets over the past week, circulating unsubstantiated rumors about its fiscal health. Miller Tabak + Co. analyst Randy Diamond, in a note, attributed the "massive put buying" in Wells on Tuesday morning to rumors about the firm's viability, though Diamond as well as regulatory and financial sources did not lend any credence to them.

Wells Fargo did not provide a comment related to market rumors about its financial health.

Wells Fargo's steadfast refusal to raise more capital is less dilutive to shareholders, which should be a positive for the stock. The company has insisted that it will earn its way out from under TARP's auspices, but an immediate capital raise might allow the firm to more quickly repay TARP and cover potential losses on its worrisome book of loans.

Nevertheless, the market has been clamoring for Wells to raise capital. The firm's second-quarter earnings report indicated that its large exposure to California real estate is taking a toll, with loans going sour and eating up capital at a fast pace.

"Wells Fargo has two big problems: bad loans and weak capital," veteran banking analyst Richard Bove, of Rochdale Securities, said in an Aug. 13 report that deemed Wells shares "fully priced."

Wells shares slumped a mere 4.8% to $26.21 in a broad market selloff Tuesday. (The shares fell an additional 13 cents in after-hours trading). The decline was in line with other big banking competitors like

JPMorgan Chase

(JPM) - Get Report

, BofA,

Morgan Stanley

(MS) - Get Report


Goldman Sachs

(GS) - Get Report

, which all fell in a 3% to 7% range. Citi lost more than 9%, while other "

zombie stocks" like

American International Group

(AIG) - Get Report


Fannie Mae


Freddie Mac

fell much harder.

While Wells escaped relatively unscathed on Tuesday -- and Warren Buffett's

Berkshire Hathaway

is still bullish on the firm's prospects -- that doesn't mean its stock is out of the woods in the near-term.

Since a recent low of $7.80 touched in early March, Wells' shares have more than tripled to close at $26.21 on Tuesday. Its ratio of share price to tangible book value is now 3.09, compared with 2.17 for JPMorgan, 1.95 for BofA, and 0.77 for Citi. There are two times as many put options for Wells than call options, meaning that twice as many options stand to profit if its share price declines.

-- Written by Lauren Tara LaCapra in New York