Warren Buffett on the Wells Fargo Fake Account Scandal

Most of you have probably heard of the scandal engulfing American banking giant, Wells Fargo (WFC). It appears the bank created millions of fake bank accounts under its customers' names. The truth, as always, is never clear but the bank says employees did it under their own will to meet employment goals. Several US government agencies are investigating and the CEO stepped down recently.

Berkshire Hathaway is the biggest shareholder of Wells Fargo (WFC) with about 10% ownership and Buffett personally owns another 2 million shares (worth approx. $100 million right now). But Buffett has not commented about the scandal, until now. In a CNN Money interview, Buffett says he still has faith in the bank and couldn't comment publicly until now because it was a passive investment as stipulated to the banking regulators.

Buffett essentially says senior management made a terrible judgement with the incentive system. It remains to be seen if this is a symptom of the current culture at Wells Fargo or if it isolated and can be cleaned up. I remember Buffett betting heavily on Wells Fargo during the financial crisis, largely due to its culture--he basically implied Wells Fargo wouldn't have made the dumb loans others did.

Some have equated the problem to that of what Salomon Brothers faced when it rigged the Treasury auctions in the 80's. It doesn't seem like the problem is as bad as that. So far it seems limited to a tiny percentage of retail customer accounts. It will only turn into a big issue if there were worse dubious actions involving brokerage accounts and corporate accounts--so far it doesn't seem to involve that.

I don't really understand banks--financials are mostly outside my circle of competence and my investments, such as Ambac, Takefuji, and Delta Financial, were complete disasters--but if you are knowledgeable about them and want a megacap bank, WFC is worth investigating as an investment.


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