WFC - Wells Fargo

[CorpRaider]

Well, I will be a little shook, but not really much more than I have been by the fact that he's willing to go through all this pain in the ass filing on BAC every week (you know he has to hate that) and I'm over here buying Wells and USB and another smaller name.

 

The argument about "he rarely sells only a little" in guessing what he sold could apply (perhaps even more obviously) to JPM, since he sold 3% of that in the prior quarter (and the basis was like 6.5 billion going into this quarter).

 

One could argue the London whale and/or libor fixing conspiracy stuff is a lot more troubling with regard to discerning incentives and oversight than opening a unfunded retail accounts so branch employees hit little bonuses.  But I guess they are "best of breed."

 

Ok, see I'm not shook anymore.

[Guest eatliftinvestgolf]

A lot of people commenting on buffett’s ownership. Some thoughts:

 

I don’t  extrapolate across BRK positions.  For example, the GS strategy presentation this spring was absolute garbage (IMO).  I would sell too!  I don’t see why that type of stuff (or the JPM sale) applies to WFC. 

 

Price always matters.    Why would he blow out of the position at $25?  To say he sold the whole thing you have to have a specific view on that.  Not that he sold at $50+.

 

The argument about relative Return vs risks for BAC I find credible. I would add that BRK’s actions during an election year may impact their ability to deploy capital in banks going forward. Owning a bank that plans to do cost cutting in an election year could lead to criticism for the mother ship!

 

In the long run, I think they’d love to own large chunks of both BAC and WFC... at the right price!

 

Finally, unless you’re investing out of a C Corp, you don’t have the same after tax return - BAC has higher dividend composition of return relative to WFC going forward.  Therefore, even if you think they are similar fair values, you would own BAC as BRK and WFC personally as a US investor. 

 

The biggest question I have is not what they’re doing, but actually what they think of Scharf. I personally do not invest based on what BRK does or does not do.  However, I respect their opinion on management to a high degree.

[rogermunibond]

If someone read the majority and the minority House committee reports, it's pretty clear that under previous mgmt (Stumpf and Sloan tenures) WFC did a terrible job of risk management and compliance.

 

Scharf pretty much admitted it when discussing consultant expenses.

 

I would guess that Buffett read both reports cover to cover.  He's said before that one can find great inside info/scuttlebutt from govt/legislative reports.

[CorpRaider]

Definitely think he read those back in March and probably watched the testimony.  I think when he was on with Becky last time (for the interview) the most damaging of that stuff was leaking out and the board members (Elizabeth Duke and the other guy) had just resigned.

[Astrea]

So WFC is no longer disclosed as a top 5 holding in the 10Q. It's either been (i) sold outright; (ii) trimmed and fallen below a materiality threshold triggering disclosure; or (iii) its market value has otherwise fallen below that materiality threshold.

 

By my rough calculations, WFC was a 5.5% position in BRK's public equities portfolio as at Q1 2020. If BRK still holds it intact, then it would represent roughly 4% of the portfolio as at Q2 2020.

 

In Q3 2017, IBM fell from a 6% position in the previous quarter to a 3.4% position and was demoted from disclosure and replaced with BofA (an 11% position).

 

Perhaps whoever prepares the 10Qs culls any position that falls below 5% from disclosure (and vice versa, adds any that crosses 5%+) but unfortunately it's not quite that clear cut. Apple was a 5.8% position in Q4 2016 and didn't get included as a top position in the 10K disclosure. It was only disclosed in the following 10Q and by then was a double digit position.

 

Anyhow - we'll soon know with the 13F

 

 

[gfp]

Yes - the more I think about it, the more I expect the Q2 sales to be primarily motivated by tax loss harvesting which would mean he primarily sold positions out of the Banks category that he would have been able to realize a loss on. 

 

This sentence form the 10Q shows that Berkshire realized taxable losses from equity sales of $4.5 Billion in the 2nd quarter, which is not consistent with selling all/most WFC (which would show a gain) along with the Airlines.  JPM would have been in a loss position, as well as BK and USB I assume.  Berkshire only bought about $700 million in new equities during the quarter (not on a net basis) unfortunately.  We do know he bought equities after quarter end though.

 

It could be that he didn't sell any Wells Fargo - or very little - as you correctly reason below

 

"Taxable losses were $4.5 billion and $3.3 billion in the second quarter and first six months of 2020, respectively"

 

 

So WFC is no longer disclosed as a top 5 holding in the 10Q. It's either been (i) sold outright; (ii) trimmed and fallen below a materiality threshold triggering disclosure; or (iii) its market value has otherwise fallen below that materiality threshold.

 

By my rough calculations, WFC was a 5.5% position in BRK's public equities portfolio as at Q1 2020. If BRK still holds it intact, then it would represent roughly 4% of the portfolio as at Q2 2020.

 

In Q3 2017, IBM fell from a 6% position in the previous quarter to a 3.4% position and was demoted from disclosure and replaced with BofA (an 11% position).

 

Perhaps whoever prepares the 10Qs culls any position that falls below 5% from disclosure (and vice versa, adds any that crosses 5%+) but unfortunately it's not quite that clear cut. Apple was a 5.8% position in Q4 2016 and didn't get included as a top position in the 10K disclosure. It was only disclosed in the following 10Q and by then was a double digit position.

 

Anyhow - we'll soon know with the 13F

[Astrea]

Yes - the more I think about it, the more I expect the Q2 sales to be primarily motivated by tax loss harvesting which would mean he primarily sold positions out of the Banks category that he would have been able to realize a loss on. 

 

This sentence form the 10Q shows that Berkshire realized taxable losses from equity sales of $4.5 Billion in the 2nd quarter, which is not consistent with selling all/most WFC (which would show a gain) along with the Airlines.  JPM would have been in a loss position, as well as BK and USB I assume.  Berkshire only bought about $700 million in new equities during the quarter (not on a net basis) unfortunately.  We do know he bought equities after quarter end though.

 

It could be that he didn't sell any Wells Fargo - or very little - as you correctly reason below

 

"Taxable losses were $4.5 billion and $3.3 billion in the second quarter and first six months of 2020, respectively"

 

 

Yes, but weren't taxable gains $832 million? WFC has a cost basis of $7.04 billion for BRK. If Buffett picked the bottom in Q2 (at nearly half book value) to liquidate his position in WFC, then those $832 million in taxable gains will indeed largely come from the WFC position........ I get the selling in Q4 2019 north of $50 but selling below $23 would baffle me....

 

Taxable losses were $4.5 billion in Q2; of which I estimate about $3.5 billion are the airlines. Another billion from other parts of the portfolio. A liquidation of JPM in Q2 may well have netted a $1 billion loss...

 

 

 

[coc]

The 13G filing thing gets me on WFC. According to SEC website, BRK would have to file if its position decreased by 5% or more, unless it is somehow exempt:

https://www.sec.gov/rules/extra/amnd13dg.htm

 

Institutional Investors: In addition to the requirement stated above, within 10 days after the end of the first month in which the person's beneficial ownership exceeds 10% of the class computed as of the end of the month, and thereafter within 10 days of the end of any month in which the person's beneficial ownership increases or decreases more than 5% computed as of the end of the month.

 

Passive Investors: Within 45 days after the end of the calendar year to report any change in the information. In addition, an amendment must be filed promptly upon the person's beneficial ownership exceeding 10% of the class and thereafter promptly upon the person's beneficial ownership increasing or decreasing more than 5%. Rule 13d-2(a).

 

 

He may have sold a combination of USB, WFC, and JPM. We know he must have sold some USB: https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

[changegonnacome]

Wells Fargo chief compliance officer out - FT  :-\

 

Less than two years in the job - no bueno

[coc]

Wells Fargo chief compliance officer out - FT  :-\

 

Less than two years in the job - no bueno

 

To be fair, another Sloan hire. Scharf has been cleaning house.

[changegonnacome]

But certainly doesn't help speed up the asset cap lifting conversations I would think.......

[rogermunibond]

If you go through the firings, resignations, retirements of the WFC board and executive ranks since 2016 it's pretty instructive.

 

2016- John Stumpf (CEO), Carrie Tolstedt (consumer banking chief)

2017- none

2018- Hope Hardison (chief admin officer), David Julian (chief auditor), Mike Loughlin (chief risk officer)

2019- Allen Parker (interim CEO/general counsel), Tim Sloan (CEO)

2020- Duke and Quiqley (board chair and member), Richard Levy (chief accounting officer), Mike Roemer (chief compliance officer), Maria Tejada (chief strategic enterprise risk officer)

[patterson]

If you go through the firings, resignations, retirements of the WFC board and executive ranks since 2016 it's pretty instructive.

 

2016- John Stumpf (CEO), Carrie Tolstedt (consumer banking chief)

2017- none

2018- Hope Hardison (chief admin officer), David Julian (chief auditor), Mike Loughlin (chief risk officer)

2019- Allen Parker (interim CEO/general counsel), Tim Sloan (CEO)

2020- Duke and Quiqley (board chair and member), Richard Levy (chief accounting officer), Mike Roemer (chief compliance officer), Maria Tejada (chief strategic enterprise risk officer)

 

also John Shrewsberry (CFO) in 2020

[ratiman]

Wells Fargo stole my car

 

[CorpRaider]

If you were trying to make the case that Wells Fargo's core business had been harmed by the scandal/lack of investigation what would you point to? 

 

I mean apart from direct regulatory or legal actions like fines, settlements, higher legal expenditures, and the asset cap.  (I get that lack of loan growth could be due to core impacts but we won't know that until the cap is lifted).  It looks to me like deposits have just grown steadily, albeit maybe a little slower than would have been the case if they were trying hard to grow the liability side of the b/s to go with some asset growth.  I do see one kind of blip down in deposits in 2018 (looks maybe better than BAC's three years of sequential declines in non interest bearing deposits through 2019 FYE).

Other than that it seems steady as she goes...I guess maybe its impossible to tell until the "gloves come off."

 

Thanks in advance.

[LC]

Deposit growth

Asset mix

Credit quality

NI margins and revenue mix

 

CECL allowances

 

I would take all these factors and compare to the other large banks. Particularly compare/contrast how different banks take allowances for their loan books.

[fareastwarriors]

Wells Fargo resumes job cuts after pandemic break

 

https://www.reuters.com/article/us-wells-fargo-layoffs/wells-fargo-resumes-job-cuts-after-pandemic-break-idUSKBN25H1UJ

 

Initial cuts will affect people the bank had planned to let go early this year before the pandemic halted layoffs, the Bloomberg report said, citing people briefed on the situation.

 

Bloomberg Law reported in July that Wells Fargo is preparing to cut thousands of jobs starting later this year.

[Junto]

I added heavy this week. Seems way oversold at these levels with a number of different catalyst opportunities.

 

Targeting $35 next spring and $40+ 2022.

[fareastwarriors]

Wells Fargo Asset Cap Is Now One of the Costliest Bank Penalties

 

 

Imposed in 2018, it may have cut roughly $4 billion off profit

That doesn’t include the expense of overhauling bank’s systems

 

 

https://www.bloomberg.com/news/articles/2020-08-24/wells-fargo-asset-cap-is-now-one-of-the-costliest-bank-penalties?srnd=premium

[ratiman]

Not to be more of a WFC troll than I already am but that reads like they're getting in front of bad news they want to blame on the asset cap.

[Junto]

Not to be more of a WFC troll than I already am but that reads like they're getting in front of bad news they want to blame on the asset cap.

 

Likely will result in more short term profit taking on assets versus holding for revenue streams. I would be curious how they are managing the cap on the deposit growth front as that has been surging and not something that is easily controlled in a market like this.

[LearningMachine]

I would be curious how they are managing the cap on the deposit growth front as that has been surging and not something that is easily controlled in a market like this.

 

Storing the deposits as cash with Fed or in Treasuries results in Risk Weighted Assets (RWA) adjustment of 0%, meaning it doesn't count towards RWA.

[wabuffo]

Storing the deposits as cash with Fed or in Treasuries results in Risk Weighted Assets (RWA) adjustment of 0%, meaning it doesn't count towards RWA

 

Are you sure about that?  I think the asset cap is a hard cap on total assets set at $1.95T - and not on risk-weighted assets.  They got a bit of reprieve for PPP lending from the Fed but that's it.  The growth in deposits (and bank reserves) does really crunch them.

 

I think the punishment on Wells is waaaaay out of proportion to the "crime", which was outrageous but didn't cost consumers the kind of money that the mortgage crisis did. 

 

No doubt, Wells had cultivated an arrogant culture from its Kovacevich days that sneered at the big NY banks and Washington regulators.  So what goes around, comes around, I guess.  Even that regulator report that was recently released couldn't resist taking shots at Kovacevich right on page 1.

 

wabuffo

[LearningMachine]

I think the asset cap is a hard cap on total assets set at $1.95T - and not on risk-weighted assets.

 

wabuffo, you're right that the Fed's order doesn't use RWA to define asset cap limit.  It defines the limit based on "WFC’s total consolidated assets reported in line 5 of Schedule HC-K to the form FR Y-9C..."  See https://www.federalreserve.gov/newsevents/pressreleases/files/enf20180202a1.pdf, page 8.

 

Form FR Y-9C, Schedule HC-K, line 5 defines "consolidated assets" by referring to Schedule HC, line 12. See https://www.federalreserve.gov/reportforms/forms/FR_Y-9C20200630_i.pdf, page HC-K-3.  Schedule HC, line 12 in turn refers to lines 1-11 in the same section.  See Id, page HC-10.  Schedule HC, line 1(b), does ask to "Include balances due from Federal Reserve Banks."  See Id, page HC-3. 

 

Folks who are interested can go through the doc to see if Wells Fargo could take advantage of any of the exceptions listed in Schedule HC above.

 

All that said, I think it would be best for Wells Fargo to try to stay under asset cap by not limiting deposits, but by limiting loans, especially higher risk loans, e.g. CRE, construction, oil, small businesses (unless guaranteed e.g. through PPP program), etc. which would help with their RWA and CET1 ratios as well, and keep the bank out of trouble during this climate.

 

 

[changegonnacome]

All that said, I think it would be best for Wells Fargo to try to stay under asset cap by not limiting deposits, but by limiting loans, especially higher risk loans, e.g. CRE, construction, oil, small businesses (unless guaranteed e.g. through PPP program), etc. which would help with their RWA and CET1 ratios as well, and keep the bank out of trouble during this climate.

 

The only issue is that IMO now is great time in the cycle to be making significant retail and corporate loans.......there's a financial survivorship bias / darwinian event happening now in corporate/retail America........you as a lender are getting a chance to look at the performance of a company in an adverse scenario and can choose to lend against groups who business models/balance sheets / managements have displayed resiliency........my guess is WFC has had to pass on many opportunities to make good quality loans at attractive rates