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Wells Fargo prints more shares to repay TARP money

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brian0918
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http://finance.yahoo.com/news/Wells-Fargo-...set=&ccode=

While a normal company going public or wanting to bring in more money for investment will create shares and sell them, Wells Fargo will not get any money from the creation and sale of these shares. The money just disappears. So all these shares needed to be created just so they could stay afloat and get out of TARP.

So rather than devaluing the dollar, they have devalued their stocks, which means every shareholder will now get less of a return, and have less money to invest in production, which means reduced production.

My question is, why didn't Wells Fargo do this in the first place? If that would have saved them, why didn't they just create a bunch of shares and sell them for cash? I can only guess that the answer is - nobody would have bought them. Is this so? Why are people now willing to buy them? What has changed about the company? Anything?

Edited by brian0918
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Yeah, they are basically looting the money off of their "legit" shareholders via this transaction, which is explained where they talk about how this move will "dilute" existing stocks by 10%: basically the value of shares owned by all the other shareholders will take a 10% hit. They're *hoping* that this will make them *look* like a more profitable company and cause their stock price to rise so that the other shareholders will voluntarily hang onto their shares to "recoup" their losses because people don't really understand what fluctuations in stock price mean.

This is basically identical to a company saying "if everyone in this department takes a 10% pay cut, we won't have to fire anyone--and maybe you'll get a raise at the end of the year if our numbers improve, so you haven't really LOST anything, have you?" You lost 10% of your salary, is what you lost.

If a company tried repaying a loan to any other financier in this fashion, they'd probably open themselves to a class-action suit from all the shareholders whose shares were devalued. But good luck getting the money back out of the GOVERNMENT, which can arbitrarily declare that whatever agreement Wells Fargo had with its shareholders is null and void.

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There are a lot of mistakes in your post Brian. Companies issue and destroy shares all the time. Sometimes they issue shares to pay off debts. It's called converting debt into equity, which is a normal recapitalization procedure.

If you and I own a business, and then we each sell more or less 17% of our shares to a third person, then each of the three of us will end up owning a third of the company. The same process is at work here. That's why you see terms like dilution. Instead of floating (say) 1,000,000 shares, Wells Fargo will float (say) 1,200,000 shares. Therefore each share represents a smaller ownership stake in the bank. Public companies do this all the time. During the boom, many companies would buy back their shares and then destroy them, effectively increasing the ownership stake of each share.

The reason that Wells Fargo did not do this originally is that it could not sell new shares in the midst of the financial crisis. Nothing has changed about the company per say. It's just that, in some environments, it is harder to raise money than in others.

Edited by adrock3215
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If all companies that received TARP repaid it this way, then inflation wouldn't occur, right? But everyone of those shareholders would have less money to invest in other things. And as you said, they might pull out of the company, inducing another government bailout.

Edited by brian0918
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No, inflation would not occur.

Each shareholder does not have "less money" to invest in other things in the strict sense. All that has happened is that each shareholder now owns a smaller piece of Wells Fargo. Take this example:

  • I own 1 share of Wells Fargo's (WFC) 100 outstanding shares (1% of the bank)
  • WFC issues 10 new shares and sells them to new investors
  • I now own 1 share of WFC's 110 shares (0.91% of the bank)

If the total market cap of WFC was originally $1000, then each of the 100 shares was worth $10. Say that the market cap stays the same after WFC sells the new shares (in general, this is about what happens). Accordingly, each of the 110 shares is worth $9.091.

This means that each shareholder's shares are worth less, which means that each shareholder's net wealth has declined. One could say that since the shareholder's net wealth has declined, he will choose to invest less money in other ventures through the so-called "wealth effect" (also demonstrated with the principle that, when peoples homes increase in value they spend more, even if their income remains constant). However, if you want to make that argument, then it would follow that any stockholder who owns a stock that is currently worth less than what he paid for it has "less money to invest."

Edited by adrock3215
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If all companies that received TARP repaid it this way, then inflation wouldn't occur, right? But everyone of those shareholders would have less money to invest in other things. And as you said, they might pull out of the company, inducing another government bailout.

Two other problems with this issue are:

1. I read that the Fed and the Treasury gathered the bankers in a room and told them that they, the bankers, were going to take the money - they, the banker, had no choice. Plus, there is the fact that the government created the situation in the first place. Like today, when the gov is pressing the banks to loan, the gov was pressing them to "help" people get houses. Resisting that pressure in the current structure where the banks depend upon having good relations with the regulators is difficult. The best thing for an honest man to do is not be a banker/gov frontman. But that wouldn't be too good for the economy, either.

2. What happened to the TARP money? The banks didn't spend it (in spite of what the stupid media says). Basically, the TARP money for the bankers was to build back their capital and loss-reserves that had been reduced by the mortgage bond mess. Capital and loss-reserves are not spent, nor are they part of the money supply. What these banks are doing is financing their recapitalization, some of which came from the TARP money and is now being paid back. That isn't a justification of the TARP program or bailouts. Nor is this money inflation, since it wasn't spent and is being paid back. Hopefully (a weird thing to say about the Fed) the Fed will just reduce their balance sheet.

Edited by C.W.
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No, inflation would not occur.

Each shareholder does not have "less money" to invest in other things in the strict sense. All that has happened is that each shareholder now owns a smaller piece of Wells Fargo. Take this example:

  • I own 1 share of Wells Fargo's (WFC) 100 outstanding shares (1% of the bank)
  • WFC issues 10 new shares and sells them to new investors
  • I now own 1 share of WFC's 110 shares (0.91% of the bank)

If the total market cap of WFC was originally $1000, then each of the 100 shares was worth $10. Say that the market cap stays the same after WFC sells the new shares (in general, this is about what happens). Accordingly, each of the 110 shares is worth $9.091.

This means that each shareholder's shares are worth less, which means that each shareholder's net wealth has declined. One could say that since the shareholder's net wealth has declined, he will choose to invest less money in other ventures through the so-called "wealth effect" (also demonstrated with the principle that, when peoples homes increase in value they spend more, even if their income remains constant). However, if you want to make that argument, then it would follow that any stockholder who owns a stock that is currently worth less than what he paid for it has "less money to invest."

I was actually referring to dividend payments. They'll get less than they were expecting before the creation of the additional shares.

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1. I read that the Fed and the Treasury gathered the bankers in a room and told them that they, the bankers, were going to take the money - they, the banker, had no choice.
True. it was discussed in an earlier thread, if anyone wants to check references. I think the NY Times reported this, so it is not some Fox-only "news".
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Analysts at Deutsche Bank upgraded banking giants Wells Fargo (WFC) and BB&T (BBT) to “Buy” on Tuesday.

Of the Wells Fargo upgrade, the analyst noted that “We expect the net impact of the capital issuance, repaying TARP and the Prudential deal to be only slightly dilutive to our estimate of normal EPS (of about $4.00). Our BUY rating also reflects our expectation for a very strong 4Q, in part from an estimated $3b-plus of gains from net MSR hedging and sales of securities. Longer term, we continue to believe WFC is positioned for market share gains given its acquisition of Wachovia and good organic growth at legacy WFC.” Deutsche also set a $36 price target on WFC stock, which closed at $25.49 on Monday.

http://www.dividend.com/blog/?p=17258

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