U.S. seen involved with Wells for some time

(Reuters) - Back in March, Wells Fargo & Co Chairman Dick Kovacevich scoffed at being pressured into taking $25 billion of taxpayer money from the government, saying his bank was healthy and didn't need it.

Now, the fourth-largest U.S. bank may find itself unable to get free of the government's clutches for some time.

The bank said on Thursday it would need $13.7 billion of capital, in light of results from the U.S. government stress test, and that it plans to sell $6 billion of common stock. The bank plans to make up the rest from internal sources like earnings.

The stress test findings give more fuel to short sellers who for months have argued that there are dangerous risks lurking on Wells Fargo's balance sheet.

And even though investors like Warren Buffett have demonstrated great faith in Wells Fargo's earnings power, government entanglement may weigh on the bank's performance in the near term, analysts said.

"Government involvement is a real impediment to doing business," said Anton Schutz, president of Mendon Capital, a fund manager focusing on financial stocks.

"Wells Fargo has tremendous earnings power, but the government's role makes valuing the company very difficult."

To investors shorting Wells Fargo, the extra capital requirements come as no surprise.

Wells Fargo has nearly $130 billion of home equity loans on its books, about a quarter of which are in California, the epicenter of the nation's housing crisis.

That loan book is about three times larger than the bank's tangible common equity, which means heavier-than-expected losses could have a big impact.

In the first quarter, as many banks were adding heavily to their loss reserves, Wells Fargo boosted its reserves by just $1.3 billion, meaning it was writing off bad loans almost as fast as it was setting aside money for them.

And the bank at December 31 had about $270 billion of off-balance sheet entities such as asset-backed commercial conduits and collateralized debt obligations that could move onto its balance sheet.

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