Wells Fargo settlement & a lesson for investors

Today WFC settled for fraudulently opening 1.5 M bank accounts and 565K credit card accounts and paid $185 M in fines.


The fine is about $.02 impact on its EPS. Investors are now accustomed to egregious behavior from banks and looking at the small fine they are cheering and moving on.

But there is a bigger question.

Given the widespread nature of the fraud, we cannot dismiss this as an action by few rouge employees. It is a reflection of bad incentives put in place by the management. WFC is considered a better managed company with stronger controls and risk management and a fraud like this should be a big surprise to the investors.

While the fallout can be minimal to WFC the lesson for investors should be “as an investor you suspend disbelief at your own peril”.

If such a widespread fraud can happen at a top-tier bank what are the risks a small bank growing aggressively with deficient internal controls present?


What are rouge employees? Like sort of communist ones or something or maybe ones that descended from French émigrés? Anyhow I’m sure Warren will sort them out.


A staggering 5,300 employees at Wells Fargo were fired in connection with this behavior, according to the Los Angeles City Attorney’s office.

It was just a few bad apples I guess…


In the Twin Cities, Wells Fargo bought the large regional Norwest Bank a long time ago, and does a lot of business here.

During the housing bubble, they were known here for giving out unfavorable loans at high rates, taking advantage of the lack of financial savvy of many people. Lower income minorities have been the biggest victims. They once called a friend of mine to get him to convert his WFC mortgage to pay interest only. A knowledgeable friend told him to stick with his current ARM. He is so lucky that interest rates have been in decline since he first got his mortgage, or he would have gone into foreclosure years ago. And I have doubts about their initial appraisal, since I don’t think his condo has ever been worth what he paid for it.

WFC is “clean” and well-run compared to many other big banks (e.g., Citi), but they’re not really looking out for their customers. I stick with credit unions myself, and even some of them have become more corporate/profit-minded. (One of my credit unions has never changed its line-of-credit interest rate since the high prime rates of a few decades ago.)


Virtually all the big banks have been hit with “massive” fines for various regulatory violations. To them, it’s just another cost of doing business.

I read recently that HSBC is under threat for failure to “clean up” certain activities (nothing too serious, things like handling financial transactions for Iran while under sanctions and helping Mexican drug cartels launder money - just run of the mill no-nos). Regulators are threatening to tear up the previous agreement they signed with HSBC and potentially hold some executives to account. Like they may be prosecuted. Apparently there was a clause in the agreement allowing the regulators to dismiss it should the bank fail to take measures to inhibit these activities.

Personally, I think that threat was released to the press in order to make it sound like the comfortable relationship between the watchdogs and the banks who provide their nourishment might be showing some signs of weakening.

First of all, I think the information leaked to the press was just window dressing. I will be stunned if a single high level manager is named, prosecuted, found guilty and sent to prison for so much as a day.

And Synchrony (formerly GE Capital Bank) was fined $225 for consumer fraud (a bit stale, this was in 2014).

I pretty much just stay away from investing in banks. In my opinion, it’s just a hotbed of whit collar crime. We need to let all the non-violent drug offenders out of prison to make room for the bankers (and regulators) who are much more deserving of a bunk in a cell with Buba.


And Synchrony (formerly GE Capital Bank) was fined $225
Really? My bar bill was more than that tonight in Singapore.


According to this article, when Wells Fargo merged with Norwest, it became a bigger Norwest, not Wells Fargo, and the scandal is rooted in Norwest Bank strategy:


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According to this article, when Wells Fargo merged with Norwest, it became a bigger Norwest, not Wells Fargo, and the scandal is rooted in Norwest Bank strategy:

Wells Fargo isn’t necessarily the type of company I look to invest in. But I would like to make a comment about this article that points to something I’ve learned in my short time as an investor. There is absolutely, positively no way you will ever truly be able to know what is taking place within a company.

Warren Buffett has an enormous stake in WFC in terms of dollars. He is insistent upon a high quality reputation for all investments. Yet he did not know this was taking place in one of his most beloved of all companies.

One has to be far more savvy than just numbers, figures and such. It truly does take a great amount of instinct to play this game today in my opinion (sorry to pull from another thread on this board). I don’t mean to imply throwing the numbers out the window…



There is absolutely, positively no way you will ever truly be able to know what is taking place within a company.

I would say that, in most cases, it would take so much work that you wouldn’t have enough time to find other investments. I agree that the quantitative method will not uncover certain flaws that should be taken into account.

If you worked at a small enough company, you would have a pretty good sense of whether it was worth it to invest in the IPO. I once worked at a software company where I pretty much knew everybody there (Princeton, NJ, not Silicon Valley). If I had had enough investment savvy back then, and if there had been an IPO, I would have felt pretty confident in my ability to decide.

I think you can get a good enough grip on many sector companies for investment purposes. However, that does not apply to banks which is why it mystifies me why anyone wants to own them except as proxies for cash for the DY. But you never know their liabilities. You never know what they own.

Rather surprised Buffett was not on the 'phone to Stumpf within the day just to confirm that, natch, he was standing down. He lost some ethical credibility on KO some time ago; not a repeat performance I hope.

Overall, I have to respect Buffett for his long-term investment savvy. But in addition to what strelna just mentioned, I’d also have to question some of his dealings with Goldman Sachs and AIG.

I just checked, and Strumpf was from Norwest, not from the pre-merger Wells Fargo. So the article I quoted earlier about the culture is likely correct.