So what will Warren Buffett do now that his biggest listed investment, Well Fargo is in the s*5t – very deep in the stuff, actually?
Warren Buffett has long talked the talk on markets, bad behaviour – he was blind sided when he rescued Salomon Brothers in the 1990’s and then threatened all manner of harm if he found bad behaviour at the tottering investment bank. It survived because of him. He has spent billions, and made billions supporting weak giants at various times, especially in the GFC (from Swiss Re, to Goldman Sachs, Bank of America and General Electric).
He has also criticised derivatives for being too dangerous, warned about the dangers of too much leverage, the activities and policies of investment banks and bankers have been another target, some rivals, hedge funds. He has portrayed himself as, while being a multi-billionaire, the good guy on the block and a friend to all, especially the tens of thousands of people who trek to Omaha in America’s Midwest, every May for Berkshire Hathaway’s annual meeting.
He has described as a sort of capitalist Woodstock, and it has become a very cool thing to attend, not only from the US but elsewhere, such as Australia.
Of course it hasn’t been all plain sailing, one of his reinsurers (General Re) had a spot of bother with some dealings in Australia in 1998 and had its knuckles rapped by local insurance regulators. In 2010 General Re was fined for a couple of dodgy deals with two American companies in the early 2000s; and several years ago a senior executive at one of the companies Berkshire had bought (Lubrizol), was found to be involved in some questionable share dealings. The executive involved was at one time said to be a contender to replace Buffett at the head of Berkshire Hathaway.
But on the whole, Buffett’s behaviour and reputation has not been found wanting. Wells Fargo – his biggest stockmarket investment and the only one where he wants to buy more – has found itself ensnared in a grubby scandal – rorting customers accounts and customers through widespread fraud and trickery. This story broke late last week in the US and has gathered pace since. Buffett has been noticeable for his absence from the story so far, preferring to remain silent.
The scandal has already cost Wells Fargo $US185 million in fines to US regulators and the City of Los Angeles (which has started legal action against the giant bank). According to US regulators, staff at the bank as early as 2011 had credit cards issued secretly without a customer’s approvals, employees of Wells Fargo created fake email accounts to sign up customers for online banking services. Customers were also hit with late fees on accounts they never even knew they had.
In all, Wells Fargo employees opened some 1.5 million bank accounts and applied for 565,000 credit cards that may not have been asked for by customers, the regulators said in a news conference.
The bank has 40 million retail customers. Regulators said the bank’s employees — many of whom have since been fired — had been motivated to open the unauthorised accounts by compensation policies that rewarded them for drumming up new business. According to media reports, many current and former Wells employees told regulators they had felt extreme pressure to expand the number of new accounts at the bank (http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/).
Well, Fargo shares have lost close to $US15 billion in market value since the story broke, and overnight Tuesday fell behind JPMorgan as America’s biggest bank by market value as the shares lost 3% (they are down 6% in three days). Wells Fargo has not admitted any guilt in this case – it seems to be a flagrant case or cases of fraud. This week Well sFargo announced that it was dropping sales targets for staff, thereby confirming that management sales policies were part of the problem.
And the bank went on the big sell campaign, courtesy of its CFO, John Shrewsberry, who told a finance conference in the US that the bank pledged to “take a big, wide fresh look at who knew what and when” about the 1.5 million fraudulent accounts and said a postmortem would take in employees at “all levels of the organisation”.
He revealed that 10% of the 5,300 workers that Wells had fired since the start of 2011 over the malpractice were “managers”. But he seemed to take the usual senior executive route of blaming underlings for the problem, telling the conference (according to US media reports):
“The people who we’re talking about here weren’t the high performers,” he told the Barclays conference. “People apparently were making bad choices to hang on in their job.”
That is wrong because the sales targets were set at the top of the bank, but no one senior executives seems to have thought to audit them and check how the staff were performing. What Mr Shrewsbury and others (and Buffett) do not seem to understand is that Well Fargo allowed its staff to commit identity theft and fraud on at least 1.5 million of its customers. It was the ultimate betrayal of trust. And the bank charged them late charges, insufficient funds and other penalties as well!
In fact the resignation of a senior Wells executive last July is now only starting to make sense. Fortune magazine explained overnight (http://fortune.com/2016/09/12/wells-fargo-cfpb-carrie-tolstedt/):
“it does not appear that Welll Fargo is requiring Carrie Tolstedt, the Wells Fargo executive who was in charge of the unit where employees opened more than 2 million largely unauthorized customer accounts—a seemingly routine practice that employees internally referred to as “sandbagging”—to give back any of her nine-figure pay.”
Fortune put that nine figure sum at $US124.6 million and said “In the July announcement of her exit, which made no mention of the soon-to-be-settled case, Wells Fargo’s CEO John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture” and “a champion for our customers.”
That puts Mr Stumpf, the long time CEO of Wells in the gun.
Buffett owns 10% of Wells Fargo (worth around $US23.7 billion), so 6% slide has cost Berkshire the best part of $US1.5 billion in lost value, no mean loss. And it comes at an uncomfortable time for him – in July, Berkshire Hathaway asked the US Fed to grant permission for it to build its Well Fargo stake above the 10% regulatory limit. The fine for the widespread fraud and other rorting behaviour in this case, and Buffett’s silence so far doesn’t look good against the Fed’s known concern with poor bank culture and executive behaviour.
And the story won’t go away. Wells Fargo’s clean-cut image (and that of Buffett) will be further tested next week when the influential US Senate Banking Committee plans to hold a hearing into the scandal. Some committee members, including Elizabeth Warren, have called on the bank’s chairman and chief executive John Stumpf to appear. Ms Warren, who already has a solid reputation as the scourge of dodgy banking practices and bank and other financial behaviours, will be on that committee.
Mr Stumpf said in a statement yesterday “We want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers,” Chief Executive Officer John Stumpf said in a statement. But the big question is whether Stumpf still has Buffett’s support.
Next week’s Senate hearing will be important in that regard, but so far, Warren Buffett has been silent on all of that and the original bad behaviour and that looks bad coming from the man who treasurers his market moniker as ”The Sage of Omaha”. But so far his silence betrays that moniker because he ain’t being very sage like.
