Updated to correct CFO's name.



) -- There's a taboo question that hasn't often been asked when it comes to

Wells Fargo

(WFC) - Get Wells Fargo & Company Report

and its TARP repayment: Investors don't seem to care a whole lot about dilution, so why does Wells' management?

Wells Fargo has been bit headstrong when it comes to the bailout program. Executives have insisted they didn't need the money, that the public stress test was "asinine," that they'll repay the funds "as soon as practical" but only while proving Wells Fargo's grit as a core-earnings machine. Any repayment will be in a "shareholder-friendly manner," implying that any capital raise will be kept to a minimum, if it's performed at all.

The attitude appeared commendable at first. Wells blew away the expectations of regulators, investors and even its own internal estimates for core capital generation during the first couple of quarters. It was as though Wells was standing up for the industry, whose morale was beaten down after posting huge losses, being doubted by the government and the market.

Now it just smacks as kind of silly.

The bank may well be able to generate the $25 billion in capital it needs to repay to the government -- eventually. But it will take a whole lot longer, and require billions more in dividend payments along the way. Many analysts and observers believe that TARP is a paperweight on bank stocks right now, and paying it back will remove some of the government's power in bank operations, along with the uncertainty it brings. The market seems to want TARP paybacks now.

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) - Get Bank of America Corp Report


JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report


U.S. Bancorp

(USB) - Get U.S. Bancorp Report

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


-related debt it will need to pay

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Prudential Financial

(PRU) - Get Prudential Financial, Inc. Report

at the beginning of 2010.

It would be a lot simpler, and far less time consuming, if Wells would simply reach out to the market for funding. Investors appear happy to oblige.

Bank of America has received nearly $33 billion from the market by issuing new stock this year, not to mention the capital raises completed in 2008. It is seeking approval to expand its float past the current 10 billion-limit on outstanding shares because of how much new stock it has issued. Yet demand was still strong, with investors snapping up $1.29 billion more than Bank of America was seeking in its most recent capital raise.

Investors have been eager to latch onto other bank stock in their recent offerings as well, including banks that raised capital to exit TARP, like

Morgan Stanley

(MS) - Get Morgan Stanley (MS) Report


Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

; smaller regional banks like


(PNC) - Get PNC Financial Services Group, Inc. Report


Fifth Third

(FITB) - Get Fifth Third Bancorp Report

; and even troubled financial firms like

E*Trade Financial

(ETFC) - Get E*TRADE Financial Corporation Report

. The market has been eagerly buzzing about a Citigroup offering to repay TARP, even though the bank is 40% government-owned and has a long ways to go in its turnaround before it can be considered a strong, independent bank again.

Investors may have concerns about Wells' loan book or its capital levels, but few doubt its core financial strength or earnings power. Its most-recent stock offering that sought $6 billion in fresh funds was well received and "heavily oversubscribed," according to CFO Howard Atkins, and ended up raising $8.6 billion in capital.

A Wells Fargo spokeswoman said the bank had nothing further to add with regard to capital raising to what CEO John Stumpf had said at a conference on Tuesday. Stumpf has repeatedly insisted that management will "earn our way out" of the crisis, and that TARP will be repaid in a "shareholder-friendly manner" with minimal dilution. He seems to be missing the point.

The government has required every other bank exiting TARP to raise capital in the market, and there's no indication that it will make an exception for Wells. Furthermore, it appears that investors would jump at a chance to buy more Wells Fargo stock -- but only if it helps remove the TARP burden. Why not just get it over with?


Written by Lauren Tara LaCapra in New York