Wells Fargo to take charge for Fannie, Freddie

By Jonathan Stempel

NEW YORK (Reuters) - Wells Fargo & Co, the fifth-largest U.S. bank, said on Monday it expects to take a third-quarter charge related to $480 million of preferred stock investments in Fannie Mae and Freddie Mac.

The bank said the portfolio of securities it holds for sale includes Fannie preferred stock for which it paid $336 million and Freddie preferred stock for which it paid $144 million.

It said the preferred stock now trades at 5 percent to 10 percent of face value, suggesting that the non-cash charge could exceed $400 million based on current market prices, if Wells Fargo bought the stock at close to face value.

"It's a material amount of money," said Bill Fitzpatrick, an analyst at Optique Capital Management Inc in Milwaukee. "Wells Fargo is a well-oiled machine that has held up extremely well throughout the financial crisis, but it shows there may be a few kinks in their armor as well."

Optique invests $1.5 billion and does not own Wells shares, he said.

Julis Tunis Bernard, a Wells Fargo spokeswoman, declined to comment. The San Francisco-based bank said it does not own any other Fannie or Freddie stock.

In its second-quarter report, Wells Fargo said it held $3.03 billion of perpetual preferred securities of "primarily financial services companies" in its available-for-sale portfolio as of June 30, without saying how much was Fannie and Freddie stock.

U.S. bank shares rose broadly on Monday after the U.S. Treasury Department said it would take control of Fannie and Freddie, which own or guarantee nearly half of all U.S. mortgages, and put them into a conservatorship.

But the bailout called for Treasury to take an equity stake in the two companies through new senior preferred shares and eliminating dividends on existing preferred shares, pushing the latter farther down the capital structure.

The shares of Sovereign Bancorp Inc, Gateway Financial Holdings Inc and Midwest Banc Holdings Inc, which have larger percentages of capital tied up in Fannie and Freddie preferred stock, fell a respective 6.6 percent, 24.6 percent and 24.6 percent on Monday.

Wells Fargo shares closed Monday up $2.36, or 7.6 percent, at $33.56 on the New York Stock Exchange. They fell to $33.25 following the after-hours disclosure of the charge.

(Editing by Andre Grenon)