Nov. 19 (Bloomberg) -- When it comes to giving the U.S. taxpayers their money back, it’s time for Wells Fargo & Co. to put up or shut up.

Ever since Wells accepted its $25 billion of federal bailout assistance last year, its bosses have been complaining that the San Francisco-based bank never needed the money, didn’t want it, and shouldn’t have been forced by the government to take it. They keep saying they want to pay it back, too.

During a Sept. 1 Bloomberg Television interview, Wells Chief Executive Officer John Stumpf said the bank planned to return the cash “shortly” and in a “shareholder-friendly way.” On Oct. 21, Chief Financial Officer Howard Atkins said the injection under the Troubled Asset Relief Program “has served its purpose, and it’s time to repay the money.”

Wells still hasn’t bought back the $25 billion of preferred shares it issued to the government, though. And I’ve got a pretty good idea why: It can’t afford to -- at least not without selling a lot more common stock first. The numbers tell it all.

Start with the bank’s tangible common equity, a bare-bones measure of net worth often used by investors for evaluating a bank’s financial strength and ability to cope with losses.

Tangible common amounts to a company’s shareholder equity, minus preferred stock, which is left out because it acts a lot like debt. Tangible common also excludes intangible assets such as goodwill, which is a bookkeeping entry left over from past acquisition sprees, and mortgage-servicing rights, which represent the estimated value of future income from collecting and processing loan payments.

Taking Account

Wells had about $37.4 billion of tangible common equity as of Sept. 30, by my math. Yet even that number is frothy, because it doesn’t take into account the fair-market values for most of the bank’s financial assets and liabilities, which the company discloses in the footnotes to its quarterly reports.

Factor in those adjustments, and Wells’s tangible common equity falls to $14.3 billion, or just 1.2 percent of the bank’s tangible assets. The main reason for the difference is that Wells said its loans as of Sept. 30 were worth $22.1 billion less than the carrying amount it showed on its balance sheet.

How can Wells repay its TARP money, when its capital cushion on a fair-value basis remains so thin? A Wells spokeswoman, Mary Eshet, responded to that question by saying: “We will work closely with our regulators to determine the appropriate time to repay TARP while maintaining strong capital levels.”

She added that “our capital position is improving,” which is true, even using the bank’s fair-value numbers. So far this year, Wells has raised $8.6 billion in a common-stock offering, reported a $4.9 billion increase in retained earnings, and slashed its common dividend.

Forgive and Forget

Naturally, Wells prefers that we look at the government’s more-forgiving capital benchmarks, which generally ignore fair- value numbers for loans and also let banks count some of their intangible assets. The most conservative of these is called Tier 1 common equity, of which Wells said it had $53 billion as of Sept. 30. Of course, to believe that number, you must be willing to give Wells credit for what it wishes its loans were worth, rather than what Wells itself said they were worth.

With fair-value gaps like Wells’s, it’s no wonder the American Bankers Association has been trying to gut the Financial Accounting Standards Board’s rulemaking authority. After caving to congressional pressure last spring by relaxing its mark-to-market rules for debt securities, the FASB has been working on a plan to require that all loans be carried at fair value on lenders’ balance sheets, rather than historical cost.

Giving Breaks

In response, the industry has been pushing a proposal by U.S. Representative Ed Perlmutter, a Democrat from Colorado, to give banking regulators the authority to suspend or change FASB standards. There’s no telling how much prettier U.S. banks’ balance sheets would look if the industry’s captive regulators got to set the accounting rules.

Wells is one of many large banks with inflated loan values on their books. Bank of America Corp., for example, said its loans as of Sept. 30 were worth $37.6 billion less than its balance sheet showed, equivalent to 34 percent of its Tier 1 common equity. Regions Financial Corp. said its fair-value gap was $16.9 billion, about double the size of its Tier 1 common. They, too, have been saying they want to repay the TARP money they took last year. It’s clear they can’t afford to.

If Wells wants to give back to the taxpayers what’s rightfully theirs, more power to it. There’s only one right way to do it, though. Go raise enough common equity to cover the cost, even if that means diluting current shareholders such as Warren Buffett’s Berkshire Hathaway Inc., which increased its stake last quarter. Otherwise, Wells should keep the cash, so it still would have the option of converting the government’s shares into common equity if it ever got into major trouble.

What the taxpayers can’t afford is the risk that some too- big-to-fail bank one day will need yet another government lifeline because it returned its TARP money too soon.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: November 18, 2009 21:00 EST