Warren Buffett is sticking by Wells Fargo, despite the $US1.185 billion in fines from regulators over numerous consider and staff abuses and the move by the Fed to order the back to freeze its balance sheet at end of 2017 levels, a move that has effectively stopped the bank from growing.
The damage was seen in the first quarter report from Berkshire Hathaway where the company fell foul of a new rule on accounting for realised and unrealised losses.
The accounting change required Berkshire to report $US6.2 billion of unrealised losses in its marketable stock portfolio, which totalled $US170.5 billion at the end of March, regardless of whether it planned to sell those stocks, as falls in the value of Wells Fargo and Coca Cola shares especially offset rises in the value of the Bank America and Apple holdings.
Wells Fargo shares fell more than 13% in the first quarter and Coke shares were down more than 5%. In dollar terms Berkshire took a huge hit as the value of its near 10% stake in Wells Fargo tumbled to $US25.3 billion at end of March, from $US29.3 billion a year earlier.
But since the scandal emerged in September 2016 Berkshire has been badly hurt by its impact.
Wells Fargo’s stock has risen just 5% since news of the scandal emerged in 2016, despite all the good news for banks including President Trump’s tax cuts and rising interest rates.
That has seen the prices of rival banks soar – for example JPMorgan Chase’s shares are up 61% and there’s been an 86% rise for Bank of America which has eased the pain for Buffett seeing it is now his second biggest bank shareholding worth $US21 billion at March 31.
On Friday Wells Faro settled a class action brought over its accounts and other scandals for $US485 million. That was after another action was settled in 2017 for $US141 million.
That takes the total for fines and class actions settlements to more than $US1.73 billion (or almost $A2 billion).
But despite this financial pain, Buffet made it clear at the Berkshire annual meeting over the weekend that he is sticking with Wells Fargo, even though it is no longer one of his most important assets.
(Buffett decided not to increase Berkshire’s stake in Wells past 10% a couple of ago after regulators, led by the Fed said to do that would force Berkshire to make more disclosures about its financial links with the bank on loans and other deals.
Berkshire sold enough Wells Fargo shares as a result to push its stake well under the 10% stake so it would not inadvertently breach that level).
Despite that decision Berkshire first invested in Wells Fargo nearly three decades ago and is remains the bank’s biggest holder with that near 10% stake.
In response to a question about whether it was time to abandon the bank, Mr. Buffett said he thought Wells Fargo’s problems would only make it stronger in the long run.
“All the big banks have had troubles of one sort or another and I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes,” he said.
(Indeed, Buffett and Berkshire helped Bank America survive the GFC and as a result is now that bank’s biggest single shareholder with a stake valued at $US21 billion at the end of March. Berkshire also invested in Goldman Sachs and helped it ride out the GFC – it quit its Goldman stake a few years ago).
Mr Buffett He praised Wells Fargo’s current chief executive, Tim Sloan, who took over when his predecessor John Stumpf was forced out as chairman and CFO at the height of the fake account scandal. Buffett was a long time admirer of Stumpf, mentioning him favourably in interviews and at previous Berkshire meetings
“I like Tim Sloan as a manager,” Mr. Buffett said. “He is correcting mistakes made by other people.”
“We know people are doing something wrong as we sit here at Berkshire. You can’t have 370,000 employees and expect that everyone is behaving like Ben Franklin.” On the fake account scandal specifically, which the bank has said resulted from intense pressure on its branch managers to increase sales, Buffett said:
“Wells Fargo is a company that proved the efficacy of incentives and it’s just that they had the wrong incentives.”
