Wells Fargo TARP Payback

wells-fargo-bankWells Fargo has decided to cash in some stock and repay its TARP money.  It’s the last major bank to do so.  Liz Moyer for Forbes:

For months, Wells Fargo insisted it would repay its $25 billion worth of federal bailout funding in a way that wouldn’t dent existing shareholders. Its priorities seem to have changed. The San Francisco based-bank said late Monday it would sell $10.4 billion in common shares to refund the money given it under the Troubled Asset Relief Program. The dilution to existing shareholders, the largest of which is Warren Buffett’s Berkshire Hathaway, seems to be less troublesome than being the only major bank left under the government’s thumb.

Monday morning, Citigroup announced plans to sell $20 billion of stock and debt to repay some of the $45 billion it took under TARP, enough to get it out from under the strictest of government controls.Earlier this month, Bank of America started the process of repaying its $45 billion in TARP funds. The exit of Wells Fargo would reduce the roster of TARP wards mostly to large regional banks, including Pittsburgh-based PNC Financial Services Group and Atlanta-based SunTrust Banks.

For the big Wall Street banks, the urgency to get out of TARP was palpable. Regulators have clamped down on executive compensation at companies taking government assistance, a threat to the traditionally huge bonus payments that go to star traders and bankers. Goldman Sachs, Morgan Stanley and JPMorgan Chase exited the TARP much earlier this year.

For regional banks without a meaningful trading or investment banking business, paying back TARP to get out of pay restrictions is less urgent. Wells Fargo, which is known mostly as a retail banking giant, last year acquired a sizable capital markets business when it bought Wachovia. Last fall when the TARP was doled out, Wells executives protested that they neither needed nor wanted the money.

One gathers neither the government nor Wells is happy with the move.  The company is undercapitalized and this is a big hit.  But its leaders clearly believe this is better than submitting to the whims of some federal tsar with no understanding of the business.  At the same time, while one would think the government would be pleased to have its loan paid back much sooner than expected, this move will deprive them of the leverage to set arbitrary compensation levels in a politically popular move.

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Rick DeMent says:

    But its leaders clearly believe this is better than submitting to the whims of some federal tsar with no understanding of the business.

    Either that or those leaders clearly believe that feathering their own nest in the short term is is a much higher priority then the long term profitability of the company or working in the best interest of the shareholders. Since they have already been faced with the same decision and they went for lining their own pockets I suspect that any reason beyond what is good for the decisions makers personally, right now, is something that only a sucker would give more then a moments thought to.

  2. What Rick said.

  3. To recapitulate Rick somewhat, there are differences between a true “capitalist” society and a “managerial” one. What we are seeing on Wall Street (and to some degree in managing Federal entities) are agency issues. That is, what is good for the managers, might just be good for the managers.

  4. PD Shaw says:

    I think it has more to do with the pressure the administration is placing on the kept banks to loan the money to small businesses that lack adequate security.

  5. Dave Schuler says:

    Extending this discussion a bit, what are the implications for future banking system problems? They certainly seem inevitable given the general weakness of the economy and the banking system in particular.

    I think that it’s to stop bailing out banks and start buying them out and selling off the assets. That certainly would have been cheaper this time around. In particular we could have bought Citigroup lock, stock, and barrel for a lot less than we used in bailing it out.

  6. I think that it’s to stop bailing out banks and start buying them out and selling off the assets.

    Of course, but is regulatory capture too complete?

  7. PD Shaw says:

    Dave, I don’t know if that would be cheaper. The Lehman bankruptcy will probably take close to ten years and billions in expenses for lawyers, accountants, and financial advisers. The expenses will get recouped from the creditors, but it’s the creditors we’re mainly concerned about. Saving the TARP banks is the convenient way to protect all of the other businesses that have contracts, savings, and investments in them.

    I still think it was the least of bad options, unless, of course, it doesn’t work.

  8. PD Shaw says:

    Along these lines, Elizabeth Warren has some interesting ideas on a credible system for liquidating large banks. I have to say I like the idea that banks have a plan for failure and how to finance it, as opposed to the notion of some special regulatory status for “Too Big Too Fails”

  9. Warren has (like Volcker) been saying the right things for a while. She has also (like Volcker) had an orbit outside that of the action team (Bernanke and Paulson/Geitner). See also Volcker’s European press tour.

  10. Another good Volcker in Europe sighting: Germans don’t trust the American economy

  11. Drew says:

    Some of you guys crack me up with your childish views.

    The Board obviously approved of the share offering. I see no news of a proxy fight, and analysts are looking at the balance sheet repair plus extricating themselves from those brilliant (snicker) govt regulators as trumping modest shareholder dilution. Well, duh.

    DeMent, Reynolds and “personna” ought to get a first clue about business and finance before embarrassing themselves with their speculative and childish whining about managers lining their pockets.

  12. Drew says:

    Separately –

    The issue of what to do about the banks was bludgeoned earlier this year on this very blog site.

    I advocated then, and reiterate now the classic cap markets solution.

    It is not necessary to “blow up” the failed banks and “sell off their assets.” Why would you punish, and lose the expertise of, the clerks, secy’s, loan officers, portfolio managers etc? And then try to find a new home for the loan assets?

    The people to be “punished” are the capital providers: equity, and as many debt holders as is needed to fix the balance sheet, and the senior managers. They didn’t tend to the roost!

    You fix the balance sheet (in English: you wipe out the old equity and debt to the extent necessary), which is simply an entity on paper, and you let the physical and people infrastructure of the old bank move forward. New equity and debt capital providers (even if they be govt/taxpayers) can reap the rewards, as they should. New senior management can be found. Its pretty straightforward. AND IT IS EQUITABLE.

    But do you see what is happening now??? The taxpayer money has been used as a low interest bridge loan!! Now that things are settling down the banks are paying off. Great. For equity risk the taxpayers are getting their money back plus passbook rates. And Obama is touting this as success??!! The taxpayers could have lost it all. This is simply shameful.

    Doesn’t anyone – anyone – have even one iota of a capital markets sense here??

    And some of you think university education is useless. Anyone who has taken Investment 101 sees this sham for what it is. Where is the press? Where is the left as Obama pulls the mother of all capitalist insider deals? Too wedded to “The One” to call him out? I think so.

    End of rant…….

  13. I guess the odd thing Drew, is that I say I’m reading Warren and Volcker, I give links, and yet you reply as if it is about “personna” and his business experience. I haven’t made this about me or a claim to my authority.

    Now, in that light do you think Warren and Volcker are wrong that we face a next round of moral hazard going forward? Or do you think I have misread them?

  14. Drew says:

    “I guess the odd thing Drew,”

    Classic odo. I don’t think anything, I make no arguments…….I just cite other guys. Sad.

    I stand by my comments. If you can convert your authorities into logical arguments against my positions, please do.

  15. Ah well, when logic fails make personal attacks. When personal attacks fail get dirtier. Classic Drew.

  16. BTW, Drew’s original “logical argument:”

    DeMent, Reynolds and “personna” ought to get a first clue about business and finance before embarrassing themselves with their speculative and childish whining about managers lining their pockets.

    There isn’t any logic there to engage with.

  17. Drew says:

    odo –

    I repeat. I stand by my comments. Your assertions are silly. If you have anything substantive to say in opposition, please do so.

    In particular, if you have any original thoughts and arguments, as opposed to references, the blog would be interested in hearing them.

    I don’t think anyone is holding there breath……

  18. Drew says:

    Ooops. “their”

  19. You are a really emotional guy Drew. I don’t even know which of our comments should relate to me. I con’t see anything between “Separately” and “End of rant” that relates to my positions.

    I don’t think you even come here for rational discussion. You’ve got an argument made up in your mind, and you’ll fill in your opponents “DeMent, Reynolds and ‘personna'” into that framework.

    To recap, when I patiently explain what I’m reading and ask you if I’m wrong, you go off again, and say it’s my responsibility to find something probably in your “Separately” … “End of rant” to disagree with.

    To me that rant is off the radar … but then your whole vibe is off my radar.

    You call me “odo” because it is a zero-content dig, right? I can’t really relate to where you are coming from.

  20. s/our comments/your comments/

  21. Drew says:

    Please. You haven’t explained anything, much less explained patiently, odo.

    And how long are you going to attempt to keep up this illusion?

    As a general proposition, the people on this site are bright. On a separate post you note………bike ride anyone?

    Spare us.

  22. tom p says:

    But its leaders clearly believe this is better than submitting to the whims of some federal tsar with no understanding of the business.

    Yeah right, neither Tim Geithner nor Larry Summers (nor any of their other similarly schooled underlings) have even the SLIGHTEST bit of understanding about the business…

    If you beleive this, have I got a deal on ocean front property in Florida for you.

    We deserve what we get.