Wells Fargo eyes merchant banking


Wells Fargo (NYSE:WFC) is primarily known as a consumer banking powerhouse, with a national franchise in the mortgage industry. It has stepped up in this market, as Bank of America has stepped down, and now can boast about its industry-leading market share of roughly one-third.

But management is smart enough to heed the lessons of recent history. You do not want to be seen as a pure play on retail mortgages. To diversify, the San Francisco-based bank is pushing into new institutional markets. Its efforts to expand in investment banking have been noted. Now it appears to be making a push in merchant banking.

Lots of proprietary investing and trading has been curtailed by the Volcker Rule, which has yet to be finalized, but merchant banking has apparently survived, and banks are going to great lengths to make sure that the really profitable proprietary investing and trading activity is compliant.

That doesn't sit well with some, especially when it comes to conservative Wells Fargo.

Reuters opines that, "Wells Fargo's private equity investments show how even button-down, staid banks are looking for loopholes in financial regulations as they seek to boost their profits. Their decisions may run counter to rulemakers' efforts to make the financial system safer. The merchant banking that Wells Fargo is embracing is riskier than investing in private equity funds with outside investors, where a bank shares any losses with others. Some critics warn that the Volcker Rule is banning the safer of the two activities, and allowing the one that could lead to bigger losses for a bank."

That said, the Volcker Rule isn't going to be changed dramatically at this point. I can only hope that bank exercises discipline--in the mold of Goldman Sachs--as it develops more merchant banking business.

For more:
- here's the article

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