Wells Fargo Needs Another $50 Billion

Wells Fargo’s announcement on April 9th was received with another euphoric surge on the stock market:

Wells Fargo & Company (NYSE: WFC) said today it expects to report record net income of approximately $3 billion for first quarter 2009, or approximately $0.55 per common share after preferred dividends, including $372 million in dividends paid to U.S. taxpayers on the U.S. Treasury’s Capital Purchase Program investment. The Company will report its financial results on April 22, 2009.

Wells Fargo seems to be doing great. So great that they may need $50 billion in capital:

Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”

Net charge-offs were $3.3 billion in the quarter, compared with $2.8 billion in the previous period at Wells Fargo and $3.3 billion at Wachovia. The current numbers are artificially low because consumers received tax refunds and a there was a moratorium on some mortgage defaults, wrote Cannon, who predicts a “re-acceleration” of charge-offs in the second quarter.

“Given rising unemployment, continued home price declines and general macroeconomic headwinds, WFC’s consumer and commercial portfolios remain at risk for meaningfully higher credit losses over 2009 and 2010,” Orenbuch wrote.

This all reminds me of Citi’s announcement one month ago. There seems to be a common theme to this: Inflate the stock price with phony good news and then quickly issue additional equity… which will further dilute the bank’s equity and push the stock even lower than before spreading the “good news”. Expect Wells Fargo’s shares to come crashing back down to where they were before and then some.

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