Will Buffett sell Wells Fargo?
Warren Buffett is one of Wells Fargo’s premiere shareholders by not only reputation, but by the size of Berkshire Hathaway’s stake. Wells Fargo has been shaken up by a scandal where over 5,000 employees were found to have opened accounts without customer consent in order to meet management quotas. These customers were hit with unjustified fees and unaware these accounts were opened in their names. Faced with this ethical crisis, what will Buffett do?
This is relevant for three reasons:
He owns approximately 10% of the outstanding shares, if he starts selling it might impact the price.
He is without contention the most successful investor of all time, if he sells it will be a signal to the market.
Putting yourself in someone else’s shoes can help to make better and more objective decisions. Who could be a better role model?
Buffett Will Sell Because:
- Buffett is a stickler for reputational harm. When he stepped up as CEO of Salomon Brothers (another bank in ethical trouble) 25 years ago he said:
“Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
- Potential compensation costs could spiral out of control. Direct costs incurred by customers are taken care of by Wells Fargo, and they were negligible (from the Bank’s perspective) to begin with. The settlement fee the bank paid came out much larger, but is still completely negligible. What is not so easy to ignore is Wells Fargo potentially being on the hook for causing damage to customers FICO scores and inflating their borrowing rate, including on mortgages. Now, if this is found to be the case, a real Pandora’s box will be opened. A percentage point on a mortgage over a number of years, at least going back to 2011, adds up to a lot of money.
Buffett Will Hold Because:
- Buffett has a history of buying stocks under duress. For example, American Express during the salad oil scandal and Salomon Brothers in 1987. He buys or holds when he believes the problems are temporary and the wrongs can be fixed.
- The main thesis behind the Wells Fargo investment has not been hurt. The bank has an enormous and low-cost deposit base and if and when interest rates rise, it stands to be hugely profitable.
- It is hard for regulators to step it up further. The public isn’t super receptive to further grandstanding either. Bank, fraud, zzzzz. Tuck me in. Do we expect anything else these days, really?
- It isn’t the aggressive cross selling that really makes or breaks Wells Fargo’s competitive position. It’s advantage comes from its enormous economy of scale and dominant market position in many geographies.
- Wells Fargo just isn’t that bad. Morningstar analyst Jim Sinegal wrote on how the Consumer Financial Protection Bureau (who fined Well’s) received nine complaints per $ 1 billion of customer deposits. Fine institutions like Regions Financial, SunTrust and Citizens Financial all came in with 50% more complaints per $ 1 billion customer deposits. Not to speak of bad apples.
- It is difficult to dispose of a 10% stake in a company. If the holding amounted to 1% or 0.5%, he could sell easily enough and be done with it. A stake this size will take a lot of effort and he’s likely taking a big hit while selling. Given the price drop will be caused by his selling, this is true value destruction. It will also confront Buffett with the problem of having to reinvest $ 24 billion.
Ultimately, I believe Warren will be answering lots of questions about Wells Fargo at the next annual shareholders meeting, as it will still be in Berkshire’s portfolio. At the same time, I don’t think it’s opportune to buy shares now and I’m not going to. Reason being, the shares will likely still be discounted after it is resolved whether or not Wells Fargo is on the hook for having potentially screwed up customers mortgage rates.
