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As I anticipated, Wells Fargo fails the stress test under all the three active scenarios (base case, optimistic and pessimistic scenarios) by a significant degree and will have to raise capital in order to achieve a Tangible Common Equity (TCE) ratio of 4.0%. The bank's TCE ratio stands at 3.06% which is significantly lower than the prescribed limit of 4.0%. Further, based on our projections, the bank's TCE will likely fall to 2.37% at the end of 2010 after adjusting for losses (both accounting as well as economic losses on account of its significant off-balance sheet exposure towards the QSPE's and SIV's) worth US$64 billion. In the base case scenario, to bring the TCE up to 4%, the bank would require to raise US$23.5 billion. Furthermore, in the pessimistic and optimistic cases, the bank must raise US$23.9 billion and US$22.8 billion respectively. 

Additionally, the bank's Tier 1 Capital stood at 8.28% as of March 31, 2009, which is marginally above the prescribed limit of 8%. However, due to significant off-balance sheet exposure of US$1.8 trillion as of December 31, 2008 and the risk associated with it, the bank Tier 1 capital will likely fall to 7.59% at the end of 2010 and WFC will have to raise significant capital to sustain the loan and lease losses and losses pertaining to off-balance exposure. According to our estimates, in the base case scenario, the bank would have to raise US$5.08 billion. In the pessimistic and optimistic cases, the bank would need to raise US$5.6 billion and US$4.3 billion respectively. Moreover, the deeper recessionary threat necessitates the bank to maintain higher capital. Depending on the asset quality of Wells, we have pegged the Tier 1 Capital to 9% instead of prescribed 8%. As per this measure, the bank would require to raise US$17.6 billion in the base case scenario.  WFC is actually up $1.74 as I type this, 10:41 am EST.

Note: Since leaks are starting to come out, I'll release my findings for the rest. Goldman and American Express can, according to my calculations, clear the 4% TCE hurdle without raising extra capital. I will not have the time to run JP Morgan, but I would not be shocked if it was found that they wouldn't be found to need more.

I will attempt to release more metrics to the free blog, as well as extensice calcs to pro subscribers and a summary to retail subscribers. As I have stated in the comments section, I believe we are in a bank bubble. Asset quality and credit metrics are still trending down sharply, while share prices are doubling and tripling. The bank that was the feature of intelligence note a month or two ago has practically doubled, and has reported blowout earnings - that is until you bother to read how they achieve those earnigns. They hid behind accounting shenanigans to conceal the fact that they are drastically under provisioning (they literally have a negative provision cushion) and commercial real estate and construction credit metrics are spiraling downward at a rapid clip. I will reveal more on this via a subscriber updated later on today or tonight.

 

I will also release findings on American Express and Goldman as well. This will be the end of the free preview of our analytics, and I would like to remind all that since I am not privvy to the same set of info that the government is, there may be some variance in terms of results.