How Wells, Citi and Morgan Stanley will fill capital holes

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Big banks’ post-stress-test capital-raising boom is underway: Wells Fargo & Co., Citigroup Inc. and Morgan Stanley already have announced plans to plug the balance-sheet holes the government found in its stress testing of 19 big banks.

The idea is to boost the size of the financial cushion that keeps banks solvent as loan losses rise.

Details from the banks’ announcements:

--- Wells Fargo said it would launch a stock offering Friday to raise $6 billion, about 44% of the $13.7-billion capital boost that the government has ordered the San Francisco bank to deliver by Nov. 9.

Wells said the rest of the capital would be generated internally from earnings growth and by issuing stock to its employee benefit plans.

Although the company said it would comply with the government’s demand, Wells made clear that it disagreed with what it called ‘excessively conservative’ estimates made by the Federal Reserve in assessing the bank’s growth projections through 2010.

Wells said the government’s estimates were ‘remote and inconsistent with the company’s strong actual results so far in 2009, strong underlying earnings momentum’ and the bank’s actions to ‘de-risk’ the loan portfolio of Wachovia Corp., which Wells bought late last year.

If Wells’ stock deal is priced near today’s closing price of $24.76, the company would issue about 240 million new shares -- boosting the total outstanding by about 6% to 4.5 billion.

Wells’ shares were trading at $24.54 after hours.

--- Citigroup, facing a $5.5-billion shortfall in the government’s measure of basic capital, said it would fill the hole by expanding a program of converting existing preferred shares into common stock.

That doesn’t bring new capital to Citi; rather, it shifts around capital already on the balance sheet, boosting the first line of defense against loan losses.

New York-based Citi said it would seek to convert up to $33 billion in preferred shares held by private investors, up from a previously planned $27.5 billion. Under the company’s initial recapitalization plan, announced in February, the government also will exchange up to $25 billion of its preferred shares for common.

The net result of the conversion would be to give the government a 34% stake in the bank, and severely dilute current shareholders. But the latter already have known this was coming -- which is why the stock is down 43% this year.

Citi’s shares rose to $4.10 in after-hours trading, after closing down 5 cents to $3.81 in the regular session.

--- Morgan Stanley, facing a $1.8-billion capital shortfall by the government’s estimates, said it would raise $2 billion by selling new shares Friday.

Based on the stock’s closing price of $27.14 today, Morgan would issue about 74 million new shares, boosting its total outstanding by about 6.8% to 1.16 billion shares.

The New York company also said it would raise $3 billion by selling debt securities. Morgan said the debt won’t be guaranteed by the Federal Deposit Insurance Corp., an assistance program that many banks have used in recent months.

Morgan’s shares eased to $26.80 in after-hours trading.

-- Tom Petruno