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The Honorable Jerome Powell, Chair The Honorable Michael Barr, Vice Chair/Supervision Board of Governors of the Federal Reserve System
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. Given the size of this transaction, we believe that the supervision staff of the Board of Governors of the 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.
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. We are concerned Wells Fargo is repurchasing stock to boost management compensation, which is largely dependent on the price of its stock. 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.
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]. A $30 billion repurchase represents a depletion of almost one-quarter of its total tangible book value.
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.
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.” 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 believe that bank regulators should steer Wells Fargo toward caution, and not a repurchase. 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. 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
Non condensed version can be found here:
https://www.citizen.org/article/wells-fargo-spending-30-billion-to-buyback-its-stock/