Why Wells Fargo hasn't paid U.S. back

Wells chief John Stumpf has said he wants to repay TARP in a 'shareholder-friendly' way.

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NEW YORK (Fortune) -- The Wells Fargo stagecoach doesn't look ready to roll out of TARP town just yet.

Bank of America (BAC, Fortune 500) said late Wednesday it will raise $20 billion in new capital to repay its Troubled Asset Relief Program obligations. After BofA extinguishes its $45 billion loan, just two of last fall's initial multibillion-dollar Treasury capital infusions into big banks will remain outstanding.

One of those debtors is Citi (C, Fortune 500), the troubled New York lender with $45 billion in borrowings and billions more in federal asset guarantees. It is widely viewed as dysfunctional and overextended, and isn't expected to repay its TARP borrowings any time soon.

The other is Wells (WFC, Fortune 500), which appears healthier and is just as eager as the next guy to repay its $25 billion in TARP borrowings. Chairman Dick Kovacevich, after all, was the guy who called the government stress tests "asinine."

But analysts note that San Francisco-based Wells has a thinner capital cushion than its rivals and a lot of loans in California, whose cities have some of the nation's highest unemployment and foreclosure rates.

It also has promised to repay its borrowings in a "shareholder-friendly" way. That's Wall Street code for "we aren't planning more stock sales" -- at a time when the feds want big banks to have as much cushion as possible.

So don't expect Wells to follow Bank of America's lead any time soon.

"We believe BofA aggressively campaigned to repay TARP, due to the significant impact it was having on its ability to recruit and retain employees, as well as a potential overhang on the stock," BernsteinResearch analyst John McDonald wrote in a note to clients Thursday. "We think the calculus of TARP repayment is a different risk/reward" for Wells.

Like Bank of America, Wells would likely need to negotiate the terms of any TARP repayment with Treasury. The government naturally wants its money back -- but it also wants to make sure banks have enough capital to avoid another meltdown should the recovery take a detour.

And unlike Bank of America, which under Ken Lewis has been known toshortchange shareholder interests, Wells seems attentive to its investors -- particularly one who doesn't see the point of selling stock to raise new funds.

"If you make them sell a lot of common equity it would kill the common shareholder," billionaire investor Warren Buffett told Fortune's Adam Lashinsky in an April interview, before Wells sold $8 billion of common stock to help fill its stress test capital gap. "It wouldn't increase the earning power in the future, and it would increase the shares outstanding."

Buffett obviously doesn't want any more of that. Berkshire Hathaway, where Buffett is CEO, held a roughly 7% stake in Wells valued at $9.2 billion as of Sept. 30, according to regulatory filings.

Buffett, who is renowned for his savvy stock-picking, told Fortune this year that investors should focus on the big profits rolling in at Wells. He views the earnings flow, not the capital levels, as the key to the bank's future.

Wells made $9.5 billion in the first nine months of 2009, as the bank benefited from federally subsidized low-cost funding and trimmed its loan book by 8%.

At the same time, loan losses are rising at all the banks right now, and the red ink from Wells' acquisition of troubled Wachovia continues to raise eyebrows on Wall Street.

BernsteinResearch estimated Wells could be forced to raise as much as $34 billion to bring its capital ratios into line with BofA's -- though McDonald stressed that the bank's profitability and reputation for strong management could reduce the amount regulators might expect it to raise.

Further complicating matters is a pending accounting change. As 2010 dawns, banks will be expected to bring some of the assets and liabilities they now hold in unconsolidated so-called special purpose entities onto their balance sheets.

Wells has said it expects doing so to add $28 billion in assets to its books, which is just 2% of its Sept. 30 asset base. But there is no shortage of uncertainty surrounding the adoption of new accounting rules, Penn State accounting professor Ed Ketz said.

"There was a huge amount of leverage created in these off-balance sheet vehicles, and I'm not sure anyone knows exactly how the books will look when the rules change," Ketz said.

Wells, for its part, says nothing has changed as far as it is concerned.

"We will work closely with our regulators to determine the appropriate time to repay the government's investment in Wells Fargo while maintaining strong capital levels," a spokeswoman wrote in an e-mail Wednesday.