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If You Think Congress is Ticked Off About Wells Fargo …

By Jim Pearce on September 30, 2016

Two weeks ago we criticized the appalling lack of accountability by senior management at Wells Fargo (“Wells Fargo Sins, But…”). 

Looks as though others agree with me. Just yesterday Wells CEO John Stumpf morphed from bank executive into a blue-suited, silver-haired piñata before the House Financial Services Committee. 

And not only has the company come under fire from Congress, but others piling on include state regulators,  presidential candidate Hillary Clinton, and the bank’s own customers. Oh, and there’s one other party not at all happy, and who may be more important than the rest combined. And there could be ways to profit from his ire. More on that in a bit. 

If Wells Fargo execs hoped this crisis would disappear after a few news cycles, they were sadly mistaken. It’s gaining momentum, with California’s state treasurer issuing a one-year moratorium on all banking activities with Wells Fargo by all of the state’s financial offices.

In an effort to quell the growing surge of outrage against Wells Fargo, CEO John Stumpf announced he would voluntarily forgo a $41 million stock bonus due to be paid as part of his compensation for 2016.

Some say this is a victory for Senator Elizabeth Warren, who grilled Stumpf mercilessly during earlier congressional hearings and demanded that he repay millions of dollars in past bonuses for reaching performance goals based on thousands of bank employees opening accounts for customers without their knowledge.

Stumpf’s agreement to forgo future income should not be confused with the “claw back” of previous compensation that Warren demanded. That’s because he hasn’t yet been paid this money. In a true claw back, money that has already been received is paid back as restitution for past sins. So far, at least, it appears Stumpf may not end up paying back any of his past bonuses. 

However, the mere fact that someone from the bank’s senior management team will end up with $41 million less than he otherwise would have had is progress, given that past sins by banks have gone largely unpunished. Hopefully it sets a precedent for future transgressions by business leaders in all industries.

And given the whipping Stumpf took yesterday on Capitol Hill, the penalty may rise above $41 million. For example, Rep. Roger Williams (R-Texas) asked Stumpf: “I’ve got one simple question for you: When are you going to resign?”

Social media outrage went on steroids yesterday when the press pointed out that Stumpf will collect around $130 million even if he is fired.

Buffetted

And Congress may be the least of Stumpf worries. One of Wells Fargo’s biggest shareholders, Warren Buffett, has remained mostly silent as this nightmare unfolds. But I suspect he’s had a few terse calls with Stumpf, and has strongly encouraged him to take whatever measures are necessary to protect Buffett’s massive investment in the bank.

As of June 30, Buffett’s Berkshire Hathaway reported that it owned nearly 480 million shares of Wells Fargo, or almost 10% of all its outstanding shares, worth $21 billion. But that’s $2 billion less than this block of stock was worth a month ago before this crisis became public, which is a lot of money in anyone’s book, including Buffett’s.

In fact, it could be Buffett himself who is contributing to the recent drop in Wells Fargo’s share price by unloading shares. Buffett has long prided himself on investing in people rather than companies, and he may feel betrayed and humiliated by the size and scope of the fraud perpetrated by an institution led by someone he thought of as not only a business associate, but as a personal friend.

In an interview with Fortune published on Sept. 21, Buffett said that he would defer comment on Wells Fargo until sometime in November, suggesting he may need to wait until after he is done unloading his stock before confirming that to the world.

If Buffett is reducing or eliminating his position, then that may be pushing its share price so low that once he is done it could bounce back after that enormous block of stock is unloaded. I suspect that may be the case, and I will be issuing a couple of options recommendations to readers of Personal Finance next week based on my interpretation of how Wells Fargo stock may behave in the months to come.


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