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Wells Fargo Should Have Failed the Stress Test

*from www.money.cnn.com, Mar. 19, 2013 (To view original article click here.)

Take Away #1: Shortly after the Federal Reserve released the results of its recent stress test, Wells Fargo themselves said it had no idea how the Fed came up with its numbers.

Key Facts and Figures:

  • Wells Fargo (WFC) said it would lose $1.7 billion in a severe economic downturn.
  • The Fed’s loss estimate under the same scenario was more than 12 times that: Nearly $26 billion.
  • Of the 18 banks that took the Fed’s stress test, only JPMorgan Chase missed the Fed’s estimate by a wider margin.
  • After Wells, Goldman Sachs did the next worse at matching the Fed’s results, off by $14 billion.

Take Away #2: Despite missing the Fed’s estimates by the widest margin, Wells was given an unconditional passing grade on the Fed’s test, the best grade possible.

Key Facts and Figures:

  • Unlike Wells, JPMorgan (JPM) and Goldman (GS) were told to take the test again.
  • The test was supposed to be about whether banks had enough capital to cover bad loans and investments to survive another financial crisis.
  • Wells was deemed to have enough, however, so were JPMorgan and Goldman.

Take Away #3: A senior Fed official hinted central banks were unhappy with the numbers JPMorgan and Goldman submitted on its test results and being forced to resubmit its capital plans. Wells is not.

Key Facts and Figures:

  • Wells Fargo’s pitch was the furthest outside of the Fed’s strike zone.
  • Wells said $32 billion of its loans would go bad in a downturn.
  • The Fed said Wells would have to swallow nearly $54 billion in losses.
  • Some analysts felt even that estimate was low, with Goldman analyst Richard Ramsden putting Wells Fargo’s potential losses at $58 billion.
  • It’s not clear why Wells isn’t being forced to resubmit its capital plans.

Take Away #4: In the wake of the London Whale, the Fed may be overly cautious about banks risking their money in the market.

Key Facts and Figures:

  • Both JPMorgan and Goldman both have large trading operations.
  • Wells Fargo does not.
  • It seems that may be the biggest reason Wells was given a full pass and its two rivals were not.

*To view original article from www.money.cnn.com click here.

Filed in: Business, Latest

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