Wells Fargo Spending $30 Billion to Buyback It’s Stock?!
Public Citizen Challenges Fed on Wells Fargo Buyback Plan
The Honorable Jerome Powell, Chair
The Honorable Michael Barr, Vice Chair/Supervision
Board of Governors of the Federal Reserve System
20th St. and Constitution
Washington, D.C. 20551
Dear Chair and Vice Chair,
On behalf of more than 500,000 members and supporters of Public Citizen, we write to challenge the Federal Reserve’s decision to permit WF Holding Company (Wells Fargo) to pursue a massive repurchase plan. If implemented, we believe the repurchase could significantly weaken the holding company’s ability to support its depository institutions.
On July 25, Wells Fargo announced its board of directors had authorized a $30 billion repurchase plan of its publicly traded common stock.[1] Given the size of this transaction, we believe that the supervision staff of the Board of Governors of the Federal Reserve System (Federal Reserve) must have acquiesced in the directors’ authorization of this proposal. Although the regulation of massive banking organizations such as Wells Fargo is balkanized among several different federal agencies, this is a decision by WF Holding Company that is within the Federal Reserve’s sole discretion to exercise its supervisorial powers. As Wells Fargo states, “The [Federal Reserve Board’s] enhanced supervision regulations for large [bank holding companies] like Wells Fargo, impose capital distribution restrictions” on Wells Fargo.[2]
Public Citizen generally opposes stock repurchases and especially those by bank holding companies. They deprive a company of funds needed to expand and pay fair wages that retain a quality, productive workforce. While typically stock prices can increase temporarily from corporate stock repurchase programs as the number of shares are reduced, the long term benefit to core equity holders is more speculative, and can be dependent on the fundamental underlying value of the common stock at the time of repurchase.[3] We are concerned Wells Fargo is repurchasing stock to boost management compensation, which is largely dependent on the price of its stock.[4] Indeed, Wells Fargo stock rose 3 percent following announcement of the buyback.[5] A mega-bank should not make precipitous decisions to further feather the nest of already well-compensated senior managers at the risk of a foundational bank safety measure. Wells Fargo’s notorious fake account scandal was similarly prompted by unwise compensation incentives at the San Francisco bank.[6]
This particular repurchase plan compounds several notable weaknesses in Wells Fargo’s capital position. Wells Fargo reported approximately $125 billion in tangible book value at the end of 2022.[7] A $30 billion repurchase represents a depletion of almost one-quarter of its total tangible book value. In addition, as of December 31, 2022, Wells Fargo had $41.5 billion in unrealized losses on its held-to-maturity (HTM) debt securities, [8] which are not recognized as a reduction in accounting book value but represent a real and specific economic loss. Given that the weighted average maturity of this portfolio was specified as 8.1 years,[9] and the benchmark 10-year Treasury rate has increased about 30 basis points since then, we believe this unrealized loss may have deepened since then. In addition, Wells Fargo reported $179.2 billion in long-term, fixed- rate residential mortgage loans,[10] the bulk of which had remaining maturities of greater than 15 years. While we are not aware of publicly available data to produce a precise calculation of the fair value loss embedded in these loans, we believe a conservative estimate may be at least 15 percent, or about $27 billion in mark-to-market fair value losses. The Federal Reserve does maintain this data and expertise to make a precise real time calculation, and we assume that the agency has done this.
So, beginning with the $125 billion in tangible book value, then deducting this $41 billion unrealized loss in its HTM portfolio, then deducting $27 billion in residential mortgage loan unrealized losses, and then deducting $30 billion in funds spent on stock repurchases, we determine that Wells Fargo holds less than $30 billion in real economic equity. That is a slender margin to buttress the firm’s $1.88 trillion in assets.[11]
Comptroller of the Currency Michael Hsu warned of banks that are “too big to manage.” He explained, “Enterprises can become so big and complex that control failures, risk management breakdowns, and negative surprises occur too frequently – not because of weak management, but because of the sheer size and complexity of the organization.”[12] We believe Wells Fargo, one of the four largest banks in the nation, qualifies as too big to manage. Having such a thin layer of capital to absorb the inevitable management mistakes of a “too big to manage” institution seems especially unwise.
We recognize that there is an argument to be made that the “deposit franchise value,” (a measure of a firm’s ability to pay its depositors less than current risk free Treasury rates) partially offsets the problems on the asset side of the balance sheet. But those arguments were of cold comfort to the hundreds of savings and loans that failed in the early 1980s due to the same interest rate mismatch that felled Silicon Valley Bank. In other words, the economic losses on the asset side are real and quantifiable, and the economic benefits of the liability side are more speculative and uncertain. These factors, we believe, mean that bank regulators should steer Wells Fargo toward caution, and not a repurchase.
Other banks face problems similar to those of Wells Fargo. Many banks suffer significant unrealized losses on bond portfolios and underwater loans totaling a collective $2.2 trillion.[13] Uninsured deposits, which are fragile because they are prone to withdrawals at a higher rate than insured deposits, stand at $7 trillion, or about 40 percent of all deposits at US banks.[14] And deposits generally may continue to decline as customers move their funds to better paying money market mutual funds. Granting Wells Fargo permission to repurchase a sizeable portion of its stock is not only bad for the health of Wells Fargo, but it also sends an imprudent signal to the entire banking community.
Given economic uncertainties, and the Federal Reserve’s current rulemaking on capital standards, acquiescing to a massive stock repurchase program at a banking organization with verifiable concerns contradicts Federal Reserve’s historic insistence that bank holding companies serve as a source of strength for their depository subsidiaries.[15] The Federal Reserve should avoid revisiting policies that have led to banking crises that forced Congress to adopt the Financial Institution Reform, Recovery and Enforcement Act in 1989,[16] the FDIC Improvement Act in 1991,[17] the Housing and Economic Recovery Act in 2008,[18] and the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.[19] The Federal Reserve must instead deploy all its statutory powers to reduce systemic risk. The Federal Reserve should reconsider and rescind any permissions granted for this Wells Fargo stock repurchase. While the Federal Reserve historically refuses to release information concerning its supervisory efforts, we at Public Citizen believe that sunshine is the best disinfectant. Therefore, we request you release any formal communications between the Federal Reserve and Wells Fargo about this ill-considered decision.
For questions, please contact Bartlett Naylor at bnaylor@citizen.org
Sincerely,
Public Citizen
[1] Jacob Pramuk, Wells Fargo Announces $30 Billion Buyback, Shares Rise, CNBC (July 25, 2023), https://www.cnbc.com/2023/07/25/wells-fargo-announces-30-billion-buyback-shares-rise.html.
[2] Wells Fargo & Company, Form 10-K, Wells Fargo (2022), https://www.wellsfargo.com/assets/pdf/about/investor-relations/annual-reports/2022-annual-report.pdf.
[3] The share price of WF Holding Company at the close of the markets on August 1, 2023, is about one-third greater than its tangible book value per share of approximately $34 per share. Thus, long term shareholders of the company will only benefit from the repurchase if the true economic value of the company is greater than the repurchase price of the stock. That seems like a very speculative proposition for Wells Fargo given the unrealized losses, discussed below, which are not accounted for by the tangible book value.
[4] Wells Fargo, Proxy Statement 2022, Wells Fargo (March 15, 2023), https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/annual-reports/2023-proxy-statement.pdf.
[5] Bob Henderson, Wells Fargo Stock Rises After $30B Share Buyback Announcement, Wall Street Journal (July 25, 2023), https://www.wsj.com/livecoverage/stock-market-today-dow-jones-07-25-2023/card/wells-fargo-stock-rises-after-30b-buyback-announcement-MdtF1asofSmA9KpLC7ib?page=1.
[6] Bartlett Naylor, Inappropriate, Public Citizen (September 2022), https://www.citizen.org/wp-content/uploads/Inappropriate-2.pdf.
[7] Wells Fargo, Balance Sheet, Yahoo Finance (website visited Aug. 1, 2023), https://finance.yahoo.com/quote/WFC/balance-sheet/.
[8] Wells Fargo & Company, Form 10-K, Wells FARGO (2022), https://www.wellsfargo.com/assets/pdf/about/investor-relations/annual-reports/2022-annual-report.pdf.
[9] Id.
[10] Id. at 26.
[11] Id. at 25.
[12] Michael Hsu, Detecting, Preventing, and Addressing Too Big To Manage, Comptroller of the Currency (Jan. 17, 2023), https://occ.gov/news-issuances/speeches/2023/pub-speech-2023-7.pdf.
[13] US Banks’ Uninsured Deposits Drop Almost $600B In Q1 2023 S&P Global Market Intelligence (June 12, 2023),
[14] US Banks’ Uninsured Deposits Drop Almost $600B In Q1 2023 S&P Global Market Intelligence (June 12, 2023),
[15] While Congress has codified the source of strength doctrine at 12 U.S.C § 1831o-1, the doctrine emanated first from the Federal Reserve itself as an expression of its policy. See Schinske and Mullineaux, The impact of the Federal Reserve’s source of strength policy on bank holding companies, The Quarterly Review of Economics and Finance, Vol 35, 483-496 (1995).
[16] Pub.L.No. 101-73 (1989).
[17] Pub.L.No. 102-242 (1991).
[18] Pub.L.No. 110-289 (2008).
[19] Pub.L.No. 111-203 (2010).