Will Wells Fargo get hooked on Wall Street crack?

October 10, 2011

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Will Wells Fargo get hooked on Wall Street crack? The California-based lender mostly has resisted lower Manhattan’s siren call. But Wells kept Wachovia’s fledgling investment bank when it bought its struggling rival three years ago. It’s still hiring. A couple of senior M&A bankers joined just last week. But getting much bigger would come at a price.

It’s easy to see the allure. With $1.2 trillion in assets, Wells is the fourth-largest U.S. bank but the only one lacking a sizable Wall Street presence. The extra options for raising capital for clients, beyond just lending, give its peers a competitive advantage. The ability to underwrite stocks and bonds, as well as offer strategic advice, would level the playing field and boost fee income. But building a decent-sized operation takes time and money.

The other option is to buy. On paper at least, Morgan Stanley looks a good fit. It would bring a top-notch investment bank and, anti-trust issues allowing, create the country’s largest brokerage. Trimming 15 percent of the combined brokerage costs would be worth about $2.1 billion to shareholders, once taxed, discounted and capitalized. That’s almost three-quarters of Morgan Stanley’s current market value.

Integrating the two cultures would be hard enough. But there’s another problem, if Wells opted to expand in investment banking. The bigger the unit gets, the more it needs a good trading operation. The greater the presence in the flow of daily buying and selling a bank can be, the theory goes, the better it can price deals and place the paper.

That doesn’t just introduce a new level of risk, it also means bulking up on inventory. That in turn chews up capital. And with more clients doing more business around the world, Wells might also need more international reach. Combined, that could make it a systemically important global bank, requiring an extra slug of capital that would increase the cost of doing business.

For now, Wells seems content to keep its Wall Street presence small. But that could easily change. Until Wachovia came along, executives from Wells dismissed owning any business east of the Mississippi, claiming it might as well be in China. And as others have discovered, before it becomes a debilitating addiction, Wall Street is first a tantalizing temptation.

MS.N

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