Wells Fargo Forced Into TARP Plan

I can’t get behind a plan that forced private companies to make the gov’t a partner when they actually do not need it….Remember, this is just weeks after had said that injecting capital directly into banks would appear to be a sign of “failure.”

From the WSJ:\

During the discussion, the most animated response came from Wells Fargo (WFC) Chairman Richard Kovacevich, say people present. Why was this necessary? he asked. Why did the government need to buy stakes in these banks?

Morgan Stanley (MS) Chief Executive John Mack, whose company was among the most vulnerable in the group to the swirling financial crisis, quickly signed.

Bank of America’s (BAC) Kenneth Lewis acknowledged the obvious, that everyone at the table would participate. “Any one of us who doesn’t have a healthy fear of the unknown isn’t paying attention,” he said.

It continues:

Mr. Paulson said the public had lost confidence in the banking system. “The system needs more money, and all of you will be better off if there’s more capital in the system,” Mr. Paulson told the bankers.

After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government’s money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn’t raise money privately, Mr. Paulson promised the government wouldn’t be so generous the second time around.

Essentially this is like Don Corleone “making the banks an offer they can’t refuse”. The message was “make me your partner now, if you don’t and need me down the road, we will crush you”.

I can’t get behind this and shame on both Barack Obama and John McCain for for blessing it based on a 1 day stock market reaction. Their blanket acceptance of it means that one not ought to expect significant improvement when either takes office. Remember, they both backed the previous plan also. These plan are polar opposites of each other, I would think one ought to have a preference.

Now, are there bank who this will save? Yes. Are there bank for whom this is necessary? Yes. They ought to have access to it. But to in no uncertain terms should they threaten a bank (Wells Fargo) that just took the gov’t off the hook for Wachovia (WB) with what, based on all accounts, was a AIG (AIG) action should their help be needed down to road, is wrong.

Let’s not forget that that the people running the show in Washington (both parties) ran Fannie Mae (FNM) and Freddie Mac (FRE), both of whom are at the epicenter of this whole mess. I am hesitant to say they know what is best.

We keep hearing that the “world is flush with liquidity”. So, if that is actually true, why hasn’t it worked so far? It isn’t a question of needing more. It is the fear of the unknown that is seizing markets. Giving banks more money does not eliminate these fears. What is does do is let them sit back more comfortably. Now, if your goal is to just allow them to feel good, then this will work.

But, if your goal is to have them go out and lend and take a certain level of risk, it won’t. The current environment is too risk adverse. If you want that behavior, then you must reduce the fear of the unknown by removing as much if it as possible.

Then, the banks will begin to loan again…

Disclosure (“none” means no position):Long WFC, none
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