Bloomberg is now reporting that Wells Fargo will need $15 billion in new capital as a result of its stress test. This is a lot less than Bank of America’s $34 billion (or so), but it’s still something of a comedown for a bank that has been making the argument that it did far fewer dumb things over the past few years than its competitors.
It’s true that Wells Fargo’s capital hole was likely dug not by its own loan officers but by those at Golden West Financial (a.k.a. World Savings). Golden West, a pioneer in now-infamous option ARM loans, was acquired in 2006 by Wachovia. That transaction resulted in so much indigestion for the Charlotte bank that it had to sell out to Wells Fargo late last year. But—unlike, say, BofA with Merrill Lynch—Wells Fargo entered into the Wachovia deal willingly. And now, say federal regulators, it needs more capital to safely make it through the recession.
None of this should be any surprise to readers of Stephen Gandel’s Feb. 19 TIME story, “Can Your Bank Pass the Stress Test?” At the time, the country’s Big Four banks were generally divided in half as sickly (Citi and BofA) and healthy (JP Morgan Chase and Wells). But after crunching the numbers, Stephen reported:
Wells Fargo is generally considered one of the banks that are least likely to fail. But our stress test says otherwise. Even with its $58 billion loan-loss buffer, Wells is still in the hole for $59 billion, or 60% of its capital. With $40 billion remaining and an expected $5 billion in income, the bank could sink to a less-than-rosy leverage ratio of 3.7%.