|More on Wells Fargo Wells Fargo Gets Out of Sub-Prime|
SAN FRANCISCO ( TheStreet) -- Everyone calm down:
Wells Fargo ( WFC - Get Report) isn't going to stop taking deposits or making loans. It's just going to charge more for deposits, stop making risky loans and stop maintaining the employees and branches that it uses to achieve that end. For investors this is a good thing; for consumers it's a bad thing; and for the company and broader banking industry it's a sign of the times.
As of July 1, Wells Fargo began implementing a $5 monthly fee for basic checking accounts that fall below a $1,500 minimum balance. On Wednesday the San Francisco-based bank also announced plans to "restructure" its consumer-finance business by shutting down the Wells Fargo Financial division that has been operating for roughly a century. As a result, Wells will stop originating subprime mortgages that were once part of the division -- something it indicated in regards to auto finance months ago -- and merge the rest of the division into the broader franchise. The change will result in 638 branch closures and up to 3,800 layoffs. Investors will see near-term charges of $185 million, or less than 3 cents per share, before taxes, which will be offset by cost savings by mid-2012. Wells is the fourth-largest bank in the country with more branches than any other at a time when the government is pressuring big banks to get smaller and de-risk. Getting out of subprime is certainly one way to do that and, if anything, Wells is far behind competitors in that sense. > > Bull or Bear? Vote in Our Poll Bank of America ( BAC - Get Report) acknowledged its subprime exit somewhere around the Countrywide acquisition. JPMorgan Chase ( JPM - Get Report) did the same, with CFO Mike Cavanaugh saying the bank had "almost no subprime production" in March 2008. Citigroup's ( C - Get Report) subprime business is part of its "bad-bank" Citi Holdings entity that's set for divestiture or wind-down. Those large competitors are facing pressure to chip away at their "too big to fail" status, too.
Bank of America has already sold stakes in foreign entities like Banco Santander ( STD), China Construction and Itaú Unibanco ( ITUB). Citi has its ongoing restructuring process, while it's unclear what JPMorgan's plan is. The House of Dimon seems to be thumbing its nose at new requirements as a result of financial reform, but has outsized exposure to private equity and has a huge capital-markets operation that will be coming under tighter rules.
Bush said the "worst part" of the announcement was that "there is now a whole segment of the American populace that will be cut off from credit." While she doesn't argue with the fact that subprime lending was out of control during the boom, Bush points out that there are many more consumers in that category now because of high unemployment levels (which, ironically, Wells Fargo's announcement actually exacerbates). Dick Bove of Rochdale Research agreed that the move won't much affect Wells Fargo's bottom line in the near term, but used it as an opportunity to express his frustration with the financial reform bill. "Ironically, it is likely that Wells will benefit by this closure by off-loading a subpar operation," said Bove. "The workers and consumers associated with this business will not. This is totally in keeping with my view that FinReg will harm everyone but the banks."
-- Written by Lauren Tara LaCapra in New York.