Wells Fargo is reportedly told to raise capital

Response follows recent stress test

By Daniel Wagner
Associated Press / May 5, 2009
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WASHINGTON - Regulators have told Wells Fargo & Co. it might need to shore up its finances after government stress tests showed it would have trouble surviving a deeper recession, sources said.

Wells Fargo is one of several banks that regulators said would need larger buffers to protect them against possible future losses, according to two people familiar with the matter who spoke on condition of anonymity.

The initial stress test results were revealed to the banks last month. Wells Fargo has until today to convince officials the bank does not need to adjust its finances.

Wells Fargo declined to comment.

After originally being scheduled for release yesterday, the results of the tests are now expected Thursday. The delay comes amid aggressive lobbying by banks that were told they would need to boost their capital.

The stress tests of the 19 largest financial firms are a centerpiece of the Obama administration's plan to stabilize banks. The tests estimate losses the banks would face in a "what-if" scenario that includes 10.3 percent unemployment and a 22 percent drop in home prices during the next two years.

If the test shows that such an economy would push a bank below a minimum level of capital, regulators ask the bank to find a way to boost its finances.

One way would be to convert preferred shares held by the government or other lenders into common stock. That would help the Treasury avoid returning to Congress for more bailout money, but it would dilute the value of common shares and put taxpayer dollars at greater risk.

Banks also could be given six months to raise money from private investors. If that doesn't work, the government could loan them additional money from the $700 billion financial system bailout.

The government will brief banks today on its final decisions about their appeals.

Regulators have said they will not allow any of the 19 firms to fail because it would be too dangerous for the financial system.

Analysts expect regional banks that were tested also might be told to raise capital, since their holdings are similarly tilted toward loans. Cleveland-based KeyCorp and Cincinnati-based Fifth Third Bancorp are among the banks in this situation.

Bank of America Corp. and Citigroup Inc. also have been disputing preliminary findings that they needed to boost capital, sources have told the Associated Press.

White House officials yesterday said they have no plans to ask Congress for more money to bail out banks. White House press secretary Robert Gibbs said he has not seen all of the test results but the administration is confident it has enough money on hand.