Opinion: Warren Buffett has a problem with Wells Fargo

This is going to be a provocative post and I have to admit it isn't based on anything solid. Nevertheless, I have a feeling that Wells Fargo is in trouble with the regulators. Before I say anything, I should note that I know very little about Wells Fargo or banking in general. My impression, for what it's worth, is that Wells Fargo is far better off than possibly all the other American megabanks. But that may not be enough in these times...

No, Wells Fargo is not going bankrupt. Buffett also probably won't lose real money in the long run. But Wells Fargo is not what it seems.

It seems quite rare, and out of character, for Warren Buffett to take a public stand defending Wells Fargo all of a sudden. What I am referring to is his Fortune interview conducted a month ago but only published a few days ago. Although Buffett has been making himself available to media in the last few years, this Fortune piece seems like it was directed at the regulators and the public.

What Buffett says in the interview about earnings power being of utmost importance is true; but, at the same time, it seems like an attempt to patch up Wells Fargo's balance sheet. The problem, as this Bloomberg article speculates, is that Wells Fargo's tangible common equity is negative. As the same Bloomberg article implies, regulators seem to favour measuring banks using tangible common equity now (supposedly because Tier 1 capital has been losing credibility.) If tangible common equity ends up being used by regulators, Wells Fargo may have to dilute its shareholders quite a bit.

Now you can see why Wells Fargo Chairman Dick Kovacevich was against the stress test and was attacking the regulators last month. The only hope of Wells Fargo is that the regulators somehow capture its supposed superior underwriting and risk evaluation skills.

Buffett is arguing Wells Fargo can earn its way back but how lax will the regulators be? The results of the stress test will be revealed on May 4th.

Comments

  1. chrisstankevitzApril 24, 2009 at 12:33 PM

    Hello,
     
    First thanks for your site, I read it every day!  Also, I own WFC.
     
    Facts: WFC's CEO and Chariman dislike the stress test and Warren B. is coming out and defending WFC.
     
    One explanation for this is that WFC's TCE is poor, the stress test will reveal it, and WFC's stock price will be punished due to the resulting equity raise.  But I will propose an alternate reason for these facts: Govt forced TARP money on WFC and is helping the weak at the expense of the poor (angering WFC), while Warren B is defending a company he believes in that is being wrongly punished (giving interviews).
     
    Warren B has historicaly been quick to pass judgement on companies that screwed up -- even while he held the stock.  Soloman in the 80s being the chief example.  He had no trouble dumping half of BAC or COP within this past year.  He bought more WFC in his personal account last in Q4 -- BRK's account is already at the max amount allowed by law).  FYI, other companies he has pumped hard: WaPo, Coke, Geico, Capital Cities/ABC
     
    I don't have any facts or numbers, but i just wanted to report an alternate explaination.
     
    Thanks again for your site and I hope you continue to post possible negative things about WFC -- I need to keep close tabs on it because I own a bunch.
     
    Chris

    ReplyDelete
  2. SivaramApril 24, 2009 at 1:47 PM

    I don't know if you saw these stories but you may want to check them out.
     
    http://www.businessinsider.com/wells-fargo-chairman-still-fuming-about-tarp-2009-4 
    You should read the article referenced in the above link if you are a WFC shareholder or interested in what is happening...
     
    Here is a general article from Bloomberg on the banks...
     
     
     
    I think if what Buffett is sayign of Wells Fargo's culture is correct, Wells Fargo should be one of the strongests survivors. The question is the impact of regulatory actions.
     
    Good luck with your investment...

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>