Wells Fargo's Kovacevich: The Importance of Hitting Bottom

"It's important to invest in the banks because banks are the grease that keeps the real economy moving"

Last year at this time, Wachovia (WB) was trading at about 47. After the bank announced a $23.7 billion, third-quarter loss on Oct. 22, its stock fell to 5.71. Wells Fargo (WFC), which agreed to buy Wachovia (besting a government-assisted bid from Citigroup (C)), also took a hit that day, with its shares down 1.34. If that decline sticks, it could diminish the value of Wells Fargo's $15 billion all-stock offer. I talked with Wells Fargo Chairman Dick Kovacevich the day before the announcement. His major concern is finding the bottom of this financial debacle before the economy is critically wounded. Kovacevich is known for not mincing words, and as head of one of the few financial institutions to avoid crippling exposure to mortgage-backed securities, he reportedly bridled at Treasury's plan to take a stake in Wells Fargo, among other big banks, as a way to loosen lending. Kovacevich says his opposition was overblown, but I got the sense that there was what is sometimes called a full and frank exchange of views.


You appear to be one of the real survivors here, you and a couple of others in the financial-services business. Here's the question on everybody's minds: Is the worst over?


Well, I think we're getting close to the bottom. And in a way, all the bad news that's been coming out lately just suggests to me that we're getting to the bottom faster. And that's important. I don't think the depth of the bottom is as important as getting there fast. If this lingers on, then I think there are serious issues with the economy that will be very hard and very expensive to correct. If we can get to the bottom, say in the next six months or so, the economy will still be strong enough to bounce back. Once that happens, it'll be a snowball effect. There's still a lot of liquidity out there ready to invest once the bottom is reached.

What's behind these wild swings in the market, and who's making money on them?Certain assets have gone from being way overvalued to way undervalued. And you can't wait for everybody to agree that the bottom has been reached to make what is often the easiest money: that first 15% or 20% after the bottom has been reached. You've got to get there just a little bit before that, because the bottom happens instantaneously, and then you're too late. So when people think there's a bottom, they're getting in, which pops up the market. Then maybe some bad news comes out, and the market pulls back a bit. That's why you're seeing these extremes.

How big a turning point is it when the U.S. government is buying stakes in American banks?For those of us who are born capitalists, you know, it's an extraordinary time. However, what's happening is a deleveraging of the financial system. By putting in capital instead of just buying loans, for every dollar you put in, institutions get to lever that 10 to 20 times in terms of the loans they can make. So I think it's very wise to attempt to neutralize to some extent the deleveraging that has gone on and will continue to go on by putting capital in that can then be levered.

Are you still troubled by the government taking a stake in Wells Fargo?I really can't talk about confidential conversations with regulators and government officials. But the issues that were involved here were much more broad than what has been reported, and I've never had an issue with doing what is in the best interest of the economy and the industry even when that may be somewhat negative to Wells Fargo on a short-term basis.

How significant are the stakes in the banks? Up to 30%?No, no. Not with the large banks, at least. It's really preferred stock that's not convertible, which I think will not only be repaid by all these banks but will be repaid in a way that will likely gain a profit for the U.S. government.

If the government is going to buy into banks, why not autos, why not airlines?It's important to invest in the banks because banks are the grease that keeps the real economy moving. If there is no financing available for corporations, for consumers, for municipalities, if that does not exist, then no industry can be successful, right? You've got to have that backbone. And that's what you have to do first. Who else you do it with, or for, is for other people to decide. But I think almost everyone agrees, until you fix the financial system, helping others won't make a difference.

JPMorgan (JPM) has quietly said it's ready to do another deal. Is Wells Fargo?No. The deal [for Wachovia] hasn't even been completed yet. So we will be spending 100% of our time on the successful integration of Wachovia.

Well Fargo has stayed very strong relative to your competitors. Why?We just didn't make some of the mistakes that others did. We still made some mistakes, and that's very unfortunate. In some cases, we should have known better. In general—and I don't know if I take much pride in this—we're probably the least ugly of the ugly ducks because we did not participate in some of the excesses, particularly related to subprime borrowers and [collateralized debt obligations] and highly leveraged loans.

What would your advice be for the next President, who will inherit a deeply damaged financial system and a troubled economy?Priority No. 1 is to get the economy going. This is the worst financial crisis since the Depression, but it is far from the worst economic crisis. Simultaneous with that, we have to figure out a way that we don't continue to have these bubbles. Therefore, we have to look at regulating differently. Some people have called that regulating more, some think deregulation is to blame [for the crisis]. I think it is really a matter of doing things differently than we have done in the past.

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