Wells Fargo sticks it to ‘shorts’ who bet against the bank

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The bears on Wells Fargo & Co. thought they had the company cornered in early March, with the stock falling as low as $7.80 -- a level last seen in the mid-1990s.

But Wells today fired a broadside at its doubters, projecting a record first-quarter profit of about $3 billion, despite setting aside $4.6 billion for potential loan losses.

The San Francisco banking titan’s shares rocketed to $19.95 at the opening today, from $14.89 at Wednesday’s close. That smacked of ‘short covering’ by bearish traders desperate to close out their bets.

Wells is benefiting in part from the mortgage refinancing boom, a fact that short sellers may have underestimated when they boosted the number of shorted Wells shares to 156 million as of March 13, a five-month high and up a steep 34% just from the end of February. UPDATE: New York Stock Exchange data reported late today for short positions as of March 31 showed a further jump in the number of shorted Wells shares, to 168 million.

In a short sale, of course, a trader borrows stock and sells it, betting the market price will fall. If the price indeed drops the trader can buy new shares to repay the loaned stock and pocket the difference between the sale price and the repurchase price.

But if the stock rises instead of falls, shorts face potentially unlimited losses until they terminate their trades. If they rush in a herd to buy back shares, they can fuel a huge rally -- which is what appears to have happened at the outset today with Wells.

The stock has since come off its peak levels at the opening, and was up $3.63, or 24%, to $18.52 at about 11:30 a.m. PDT.

Wells still may need to raise more capital to bolster its balance sheet, a point its critics have harped on for months. But a $3-billion first-quarter profit could encourage investors who otherwise might have been reluctant to buy new shares in the bank. That’s assuming, though, that Wells isn’t masking the extent of its troubled loans.

Wells, which got $25 billion in government capital under the financial-system rescue, took great pains in its news release today to address its new constituency: taxpayers.

‘Wells Fargo continued to extend significant amounts of credit to U.S. taxpayers in first quarter 2009,’ the release says.

And in a highlights section of the release, Wells says it has extended ‘more than $225 billion of credit . . . to U.S. taxpayers since early last October, nine times the amount received from U.S. taxpayers through the U.S. Treasury’s Capital Purchase Program investment.’ (Presumably, though, you don’t actually have to be a taxpayer to borrow from Wells.)

Wells, which has said it didn’t want or need the $25 billion in federal capital, hasn’t hid its aggravation over becoming a forced partner with Uncle Sam. Chairman Richard Kovacevich lashed out at the Treasury in a March 13 speech, saying a new plan announced in February to ‘stress test’ major banks for adequate capital was ‘asinine.’

‘We do stress tests all the time on all of our portfolios,’ Kovacevich said in the speech, according to Bloomberg News. ‘We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.’

He said that would just encourage short sellers to make bets on which banks would fail the test.

But if they targeted Wells, they’re regretting it today.

-- Tom Petruno