$WFC Increases Private Equity Despite Volcker Rule

“(Reuters) – When former Wells Fargo & Co Chief Executive Dick Kovacevich joined Norwest Bank in 1986, he had reservations about its private equity investments as he did not think it was the kind of business a bank needed to be in. He got over it.

“I was skeptical, met with the people and became convinced that they absolutely knew what they were doing and that this was a business we could manage and do well,” said Kovacevich, who became CEO of Wells Fargo when it merged with Norwest in 1998, and retired as chairman of the fourth-largest U.S. bank in 2009.

U.S. lawmakers shared Kovacevich’s skepticism about private equity when they crafted the Dodd-Frank financial reform bill in 2010. In a section of the law known as the “Volcker Rule,” they blocked banks from making big bets with their capital, including sizable investments in private equity funds, fearing taxpayers would be left on the hook when wagers soured.

The fine print of the Volcker Rule – named for former Federal Reserve Chairman Paul Volcker – is expected to be finalized as soon as this year. Major banks such as Bank of America Corp and Citigroup Inc are already pulling back from private equity investments ahead of the rules.

But Wells Fargo is taking a different path. The bank invests in buyouts and venture capital deals largely on its own, with capital only from Wells Fargo itself and some employees. By avoiding equity from outside investors, the bank is considered to be engaging in “merchant banking,” an activity that is likely to be exempt under the Volcker Rule, lawyers and people familiar with the matter said.

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….”

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