By Suzanne Cosgrove
The consumer advocacy group Public Citizen has sent a letter (dated August 7) to Federal Reserve Chairman Jerome Powell and Michael Barr, Vice Chairman of the Fed’s Board of Governors, asking the Fed to rescind its decision to allow Wells Fargo’s bank holding company, WF Holding Company, to repurchase $30 billion of its publicly traded common stock.
If the plan goes through, the group said, “we believe the repurchase could significantly weaken the holding company’s ability to support its depository institutions.” Going a step further, “Given the size of this transaction, we believe that the supervision staff of the Board of Governors of the Federal Reserve System (Federal Reserve) must have acquiesced in the directors’ authorization of this proposal,” the group said in its letter.
Evaluating risks, rewards. Public Citizen added the caveat that it generally opposes stock repurchases, especially those by bank holding companies. It noted that while stock prices generally rally, at least temporarily, after a corporate stock repurchase program, the long-term benefit to core equity holders is speculative and can be dependent on the basic underlying value of the common stock at the time of repurchase.
In the case of Wells Fargo, Public Citizen said it was concerned Wells Fargo wants to repurchase shares to boost management compensation, which is linked to the price of its stock. Citing news reports, the group added: “Indeed, Wells Fargo stock rose 3 percent following announcement of the buyback.”
Drilling down further. The current repurchase proposal "compounds several notable weaknesses" in Wells Fargo’s capital position, the group said. Wells Fargo reported approximately $125 billion in tangible book value at the end of 2022, which suggests a $30 billion repurchase represents a depletion of almost one-quarter of its total tangible book value.
In addition, as of Dec. 31, 2022, Wells Fargo had $41.5 billion in unrealized losses on its held-to-maturity (HTM) debt securities, the group said, which are not recognized as a reduction in accounting book value but represent a specific economic loss.
Dissecting data published in Wells Fargo’s 2022 annual report, Public Citizen calculated Wells Fargo holds less than $30 billion in real economic equity, beginning with the deduction of the $41 billion unrealized loss in its HTM portfolio from its $125 billion in tangible book value, then also deducting $27 billion in residential mortgage loan unrealized losses and $30 billion in funds spent on stock repurchases. “That is a slender margin to buttress the firm’s $1.88 trillion in assets (as of year-end 2022),” the group said.
Setting an example. “We believe Wells Fargo, one of the four largest banks in the nation, qualifies as too big to manage,” the group said. “Having such a thin layer of capital to absorb the inevitable management mistakes of a ‘too big to manage’ institution seems especially unwise.
“Other banks face problems similar to those of Wells Fargo. Many banks suffer significant unrealized losses on bond portfolios and underwater loans … Granting Wells Fargo permission to repurchase a sizeable portion of its stock is not only bad for the health of Wells Fargo, but it also sends an imprudent signal to the entire banking community,” the group concluded.