WFC - Wells Fargo

[John Hjorth]

If I knew that, I wouldn't have posted that way, rb,

 

WFC Announcement [2018.02.02]: Wells Fargo Commits to Satisfying Consent Order With Federal Reserve.

 

It has the smell of "Now!" all over it.

[gary17]

nice parting gift from Jenet yellen lol

[LC]

They Fed has to go in and test the controls first, usually in conjunction with management and audit. Scope and impact are determined, and remedial action plans are put in place and need to be accomplished. This coukd probably be a multi year situation until the Fed is satisfied.

[boilermaker75]

Not funny man, WFC is my second largest position.  >:(

 

That being said after this I wouldn't be surprised if uncle Warren takes a trip to the west coast and fires them all.

 

My second largest position also, after, you guessed it, BRK.

[Spekulatius]

Not funny man, WFC is my second largest position.  >:(

 

That being said after this I wouldn't be surprised if uncle Warren takes a trip to the west coast and fires them all.

 

My second largest position also, after, you guessed it, BRK.

 

It’s hard to justify paying more than $50/ share for this stock. I think it is a sell at $60. - totally overvalued. They are going to have the FED breathing down their neck for years, no growth, increased expenses and good people working for WF  will move to competitors for greener pastures.

[Viking]

This issue was discussed on the Q4 conference call: “On the call today the CEO was asked if the sales scandal issues are finally largely behind the company and the CEO said no he could not say that... leading rational people to wonder what issues will hit in 2018.” We now know why the CEO answered the way he did.

 

My read is WFC has been in denial since this first happened and they still must not be moving fast enough for the Fed. Stumpf blew it big time. And my guess is the new CEO has only done marginally better. The Fed looks like it got tired of WFC dragging its feet and not getting at the issue.

 

Compare WFC handling of this issue to how C responded when they failed CCAR the first time. When that happened to C I think the CEO said shortly after if they fail again he should be fired. C had its holy Jesus moment and spent enormous time and resources to make the internal changes the Fed wanted. I think C passed CCAR the following year with flying colours and now have a very good working relationship with the Fed.

 

Of course, this is all just a wild guess. We will know much more in the coming days and weeks. My guess is the new CEO’s days are numbered.

 

I am very much looking forward to hearing what Buffett thinks. He has a saying about mistakes being ok but damage a shred of a firms reputation and he will be ruthless. It looks to me like this issue has damaged more than a shred of WFC reputation.

 

[StubbleJumper]

So beyond the audit of regulatory and statute compliance that is prescribed, what does WFC do from here?

 

Since asset growth (loans) is limited, what measures can WFC take to continue to grow loans without growing aggregate assets?  A few ideas:

 

1) Return a shit ton of capital to share holders in the next CCAR round?

 

2) Engage in some complex sale and leaseback schemes for whatever real property that WFC might own (office towers, branches) and dividend out the money?

 

3) Repay/repurchase whatever debt or preferreds are out there?

 

4) Some sort of securitization and asset sale with the proceeds being dividended to shareholders?

 

5) Reduce deposit interest rates to slow the inflows and increase net interest margins?

 

6) Spin some assets?

 

7) Other ideas?

 

 

SJ

 

[sleepydragon]

Well, Yellen is definitely not thinking about getting her mortgage refinanced!

 

 

 

[rb]

I don't think that the situation is so dire that they must cede competitive ground.

 

On the asset side they have 273B in short term investments and repo.  As well as 415B of investment securities. That's 688B total. Some of the short term stuff they need for liquidity. But the can pull back a lot on this 688 to make room for new loans.

 

On the liability side there's 94 billion in short term borrowing that can be easily replaced by deposits.

 

So they have room to actually run the business. The regulatory action was a wake up call delivered with an air horn though.

[boilermaker75]

Not funny man, WFC is my second largest position.  >:(

 

That being said after this I wouldn't be surprised if uncle Warren takes a trip to the west coast and fires them all.

 

My second largest position also, after, you guessed it, BRK.

 

It’s hard to justify paying more than $50/ share for this stock. I think it is a sell at $60. - totally overvalued. They are going to have the FED breathing down their neck for years, no growth, increased expenses and good people working for WF  will move to competitors for greener pastures.

 

Maybe.

 

My cost basis is near $10, so it would be a huge tax bill to sell.

[John Hjorth]

Thank you for some very good posts about this WFC situation.

 

I read the attachments to this FED announcement this morning. Those attachments are a total humiliation of the WFC board of directors. The board is accused of not doing what it should do, and the board actually is ordered homework to do, with reporting to FED on running basis. Four directors are ordered to leave, too. I have not earlier seen anything like this for a large US bank.

 

All this roots to corporate governance of the bank. From the letter to Mr. Stumpf:

 

... In addition, according to the April 10, 2017, Sales Practices Investigation Report (Report), you were aware of specific sales practice problems over the years in your management capacity at the firm. However, as Chair, you did not ensure that the full board received detailed and timely reporting from senior management. Moreover, you did not appear to initiate any serious investigation or inquiry into the sales practices issues (or any other compliance issues that you may have been aware of at the time) or put a proposal to do so to the WFC board. ...

 

In short, the "blessings" of having a bank CEO being a Chairman at the bank simultaneously.

 

- - - o 0 o - - -

 

Here, all that got weeded out swiftly with firm hand for the banks post GFC, including incompetent board members at banks [here called "board of aunts"].

[Jurgis]

My read is WFC has been in denial since this first happened and they still must not be moving fast enough for the Fed. Stumpf blew it big time. And my guess is the new CEO has only done marginally better.

 

+1. Denial, no responsibility, blame shifting, blaming customers. New CEO too.

 

I might buy some BRK if it gaps down enough on Monday. Not buying WFC. Do not own it either.

 

Good luck.

[AzCactus]

This is when I think of Buffett's quote about reputation--a lifetime to build it and 5 minutes to lose it or something to that effect.  If I was a client of Wells Fargo or a shareholder I would really be thinking there are better options.  I think it would be foolish to underestimate the potential ramifications of being SINGLED out by the fed. 

[gary17]

The press release says they will maintain capital return— so if they can make the adjustments and the shares get really cheap maybe this is the BAC or C moment two years ago that is worth thinking of buying. 

[StubbleJumper]

I don't think that the situation is so dire that they must cede competitive ground.

 

On the asset side they have 273B in short term investments and repo.  As well as 415B of investment securities. That's 688B total. Some of the short term stuff they need for liquidity. But the can pull back a lot on this 688 to make room for new loans.

 

On the liability side there's 94 billion in short term borrowing that can be easily replaced by deposits.

 

So they have room to actually run the business. The regulatory action was a wake up call delivered with an air horn though.

 

 

Yep.  In an ideal world, to not cede competitive ground, WFC would grow its loans by perhaps $50B or $60B during 2018, which would be ~5% or so.  If this enhanced supervision by the Fed lasts only one year (let's hope!), there should be no trouble to manage aggregate asset levels by cranking up dividends and stock buy backs, repaying debt or buying back prefs, or, as you said, re-profiling assets.  If the enhanced supervision and asset growth restriction lasts two or three years, things might start to become a bit tight.

 

The perverse part of this is that one of the rational ways for WFC to manage the Fed's asset restriction is to reduce it's capital levels through divvies and buybacks, to reduce its financial flexibility by repaying long-term debt and to underestimate (for accounting purposes) its allowance for doubtful accounts.  IMO, that would not exactly be positive for WFC's clients.

 

 

SJ

[rb]

The perverse part of this is that one of the rational ways for WFC to manage the Fed's asset restriction is to reduce it's capital levels through divvies and buybacks, to reduce its financial flexibility by repaying long-term debt and to underestimate (for accounting purposes) its allowance for doubtful accounts.  IMO, that would not exactly be positive for WFC's clients.

 

 

SJ

I don't think that they need to to reduce their capital. They could let their capital levels rise a delever a bit. Not really such a bad thing. Basically what I'm thinking here is that for Wells to continue to grow under this Fed restriction they need to become more retail and maybe derisk a bit. I'm perfectly fine with that.

 

I also don't think that the restriction will last more than a year. We shouldn't forget that uncle Warren does own $32 billion worth of stock. He's probably already at work weaving that behind the scenes magic where troublesome managers mysteriously vanish (anyone heard of Doug Ivester after 2000?), regulators are appeased, and problems dissapear.

[John Hjorth]

... I also don't think that the restriction will last more than a year. ...

 

From the WFC News Announcement:

 

... Within 60 days:

The company’s board will submit a plan to further enhance the board’s effectiveness in carrying out its oversight and governance of the company.

The company will submit a plan to further improve the company’s firm-wide compliance and operational risk management program.

 

After Federal Reserve approval, the company will engage independent third parties to conduct a review to be completed no later than September 30, 2018 to confirm adoption and implementation of the plans. ...

 

So this issue has to be solved [planned, FED approved, adopted & reviewed] to FED's satisfaction within 8 months from now. The question I'm asking myself is actually: "If not, what then?" [Continued restrictions combined with extension of deadline, or more sanctions on top of restrictions already in place.]

[Cigarbutt]

Disclosure: haven't looked at the financials for at least five years.

Around 10 years ago, read Stagecoach (see link below).

The last chapter of the last section is titled: The Next Stage. Edited in 2002.

 

The recent news look absolutely terrible.

I would guess though that it does not really change the long term prospects.

 

https://www.amazon.com/Stagecoach-Wells-Fargo-American-West/dp/0743234367/ref=sr_1_1?s=movies-tv&ie=UTF8&qid=1517751759&sr=8-1&keywords=stagecoach+wells+fargo

 

Of course, times have changed as Wells Fargo built its franchise when there were no safety nets and hardly any government.

My own humble assessment is that Wells Fargo is not so different from the typical big bank. To be the first one to have a wrap on the knuckles may not be a defining event.

To succeed, one needs to adapt, and your opinion about Wells Fargo may have to rest on an assessment of its ability to adapt.

[oddballstocks]

Disclosure: haven't looked at the financials for at least five years.

Around 10 years ago, read Stagecoach (see link below).

The last chapter of the last section is titled: The Next Stage. Edited in 2002.

 

The recent news look absolutely terrible.

I would guess though that it does not really change the long term prospects.

 

https://www.amazon.com/Stagecoach-Wells-Fargo-American-West/dp/0743234367/ref=sr_1_1?s=movies-tv&ie=UTF8&qid=1517751759&sr=8-1&keywords=stagecoach+wells+fargo

 

Of course, times have changed as Wells Fargo built its franchise when there were no safety nets and hardly any government.

My own humble assessment is that Wells Fargo is not so different from the typical big bank. To be the first one to have a wrap on the knuckles may not be a defining event.

To succeed, one needs to adapt, and your opinion about Wells Fargo may have to rest on an assessment of its ability to adapt.

 

When times are good everyone claims a company's culture is one of their moats, or reasons for doing well.

 

When WFC gets hit like they do it seems like culture is forgotten.  Long term this absolutely matters.  The culture was never great to start, in the banking industry this was/is well known.  Now with the consent order it's another nail in the coffin for high performers, they can't grow, instead they need to farm accounts.  So they will leave.

 

There are long term consequences to these things. 

 

They other three big banks have always seen WFC as the patsy at the table, they still are, this is only going to get worse over time.  They need an outsider to come in, clear the ranks, re-tool their business and rebuild.

[CorpRaider]

Good Ole Norwest...

[bookie71]

fyi

https://mail.google.com/mail/u/0/#inbox/1616617efb0ac232

[sleepydragon]

fyi

https://mail.google.com/mail/u/0/#inbox/1616617efb0ac232

 

You are posting a link into gmail inbox. Can’t read it

[Guest Schwab711]

For the longest time, WFC's 'moat' was the deposits + mortgages. They still have those advantages relative to other banks. I don't understand how the perception of WFC has changed so much relative to ~6 months ago. Every major US bank not named WFC contributed to LIBOR fixing. Every bank of size gets fined every year for various incidents of fraud. No one is holding back investing in JPM because of 'poor risk control' (London Whale) or 'endemic fraud culture' (LIBOR fixing).

 

Of course my opinion would probably change if the Fed penalties were increased or if WFC refused to respond to them, but current news seems like noise. The terminal value for WFC is essentially unchanged and the present value of the next couple of years are nominally lower relative to just prior to the announcement.

[nkp007]

For the longest time, WFC's 'moat' was the deposits + mortgages. They still have those advantages relative to other banks. I don't understand how the perception of WFC has changed so much relative to ~6 months ago. Every major US bank not named WFC contributed to LIBOR fixing. Every bank of size gets fined every year for various incidents of fraud. No one is holding back investing in JPM because of 'poor risk control' (London Whale) or 'endemic fraud culture' (LIBOR fixing).

 

Of course my opinion would probably change if the Fed penalties were increased or if WFC refused to respond to them, but current news seems like noise. The terminal value for WFC is essentially unchanged and the present value of the next couple of years are nominally lower relative to just prior to the announcement.

 

BAC went from the most hated bank in 2011/2012 to the most loved back today. Wells will be back one day. It's all cyclical. Still has the best loan book in the business.

[rb]

BAC went from the most hated bank in 2011/2012 to the most loved back today. Wells will be back one day. It's all cyclical. Still has the best loan book in the business.

+1 I would add that Wells still has the best risk management in the business. That's probably what matters most when it comes to holding banks. You've got talking heads today saying that this is so negative for Wells because other banks are going to outperform it over the next 12 months. But what happens when the next banking crisis comes and we sort the wheat from the chaff?