By all accounts, the account scandal at Wells Fargo (WFC) is a problem that is vastly larger than that implied by the $185 million fine levied on the bank. The fine is a drop in the bucket for Wells. The public reaction is what is causing the bank severe damage.
It may not seem so obvious, but the Wells Fargo crisis is similar to the one faced by Chipotle Mexican Grill (CMG) over its food-borne illnesses just over a year ago. Both companies were considered pillars of their industry -- Chipotle with its focus on fresh ingredients and Wells Fargo considered the most ethical bank in the industry -- and both let consumers down in a big way.
The similarities end there, however. Chipotle's actions were not deliberate or deceptive; at Wells, the opening of fake accounts appears very much so.
The 10,000-pound gorilla in the Wells Fargo debacle is its largest investor, Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) . Buffett is widely known for lavishing praise on Action Alerts PLUS charity portfolio Wells Fargo, viewing it as the best-run financial institution. Mr. Market agreed, bestowing a price-to-book-value ratio that was significantly above the rest. Buffett recently asked regulators to allow Berkshire to own more than 9.9% of the company.
So far, Buffett has been quiet on his views on Wells. He did have a call with former CEO John Stumpf telling him that the public effect on Wells was going to be far bigger than he could realize. Weeks later, Stumpf was out. For now, we don't know if Buffett had any influence here. He may not have had personally, but he casts a wide shadow as an investor and his reputation is so widely revered for his business principles.
More so, Buffett in previous years has been vocal on his views about managers who fall asleep at the wheel or mislead stakeholders. After watching Stumpf's poor testimony to both Senate and House committees, it's no surprise that he is out.
By today's standards, Wells Fargo has set the example. Stumpf is out with no bonus, his unvested options are gone, and no severance. Many CEOs who presided over failed banks during the financial crisis did financially better. Stumpf did the right thing by walking away quietly, but I think the shadow of Warren Buffett had a big hand in it, even if Buffett directly did not.
I don't see Berkshire selling any shares of Wells Fargo over this. Buffett has navigated through crises before. What I think you will see is that Wells Fargo gets its act together very quickly. And underneath it all, Wells still remains a strong financial institution. And from crisis arises opportunity. Regulators like to point out that the market decline in Wells verifies the significance of what Wells did.What Wells did was grossly wrong, period. Irrespective of the level of market decline. That being said, the stock is only down 10% or so. Perhaps that's a testament to the strength of the bank. Or if shares are to fall further, perhaps it is a great time to invest, knowing that a lesson will be learned. There's a big shadow ensuring that will happen.