Wells Fargo

According to AP Wells Fargo will be asked to raise some capital. Earlier this morning I mentioned that this was likely so it will be interesting to soon see the details on dilution.

While Wells regulatory capital ratios were fine before Wachovia....the size and scope of that troubled bank reduced the regulatory capital ratios of the combined Wells-Wachovia to the low end.

Wells is the best bank franchise out there. The franchise value will become more obvious over time as the superior economics of the Wells model kicks into gear.

I think Buffett's view is the correct one but regulators don't look at the economics the same way he does.
"I can tell you that US Bancorp and Wells Fargo are extremely strong banks," Buffett said Monday in an interview with CNBC. "They have terrific earning power, and earning power is enormously important in what happens to a business in the future. And you couldn't have two better banks virtually positioned than those two for future earnings."

But Buffett said the stress test results might not fully reflect the banks' strength. A company with low production costs but lots of debt might survive a recession but flunk the test, while a company with high production costs and no debt might ace the test but could not survive price declines, he said.

Buffett said Wells Fargo has the lowest cost of production of any of the big banks.
In any case, the common equity dilution should not end up being significant so the long-term investment thesis remains the same.

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Wells Fargo
Wells Fargo
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