Warren Buffett isn’t known to ask much of companies in which he buys stock. Then last year, as Wells Fargo & Co.’s top investor, he publicly advised the board not to hire a leader from Wall Street — and it did.
What ensued shows what can happen when a company rejects the legendary investor’s advice. Buffett’s Berkshire Hathaway Inc., already trimming its Wells Fargo stake to comply with a 10% regulatory limit, began cutting further last year just as Charlie Scharf became the bank’s chief executive officer, eventually unloading most of it. In a few more weeks, Wells Fargo shareholders will learn whether Buffett got out entirely.
Already, the sales mark a striking retreat: Buffett spent three decades praising Wells Fargo, making it the conglomerate’s largest stock investment at times, and in turn becoming the bank’s top shareholder. He stuck with it through the 2008 financial crisis and showcased it at his company’s festive annual meeting, even having family members delivered in one of the bank’s iconic stage coaches.
The drama is now building as Scharf prepares to lay out his vision for turning around the scandal-ridden lender, which has seen its stock slump 57% this year. If Buffett keeps Wells Fargo in his portfolio, it would put his imprimatur on the new strategy — potentially helping Scharf sell his plan to other investors.
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But if Buffett were to exit entirely, “it’s a big negative for Wells,” said Paul Lountzis, who oversees investments including stakes in both companies as president of Lountzis Asset Management. “It’s the opposite of a stamp of approval. And certainly you don’t really want that.”
Buffett didn’t respond to messages seeking comment. A spokesperson for Wells Fargo declined to comment.
The odds were arguably stacked against Scharf keeping Buffett happy by the time he arrived at Wells Fargo last October.
Wells Fargo has been plagued by scandals for four years, starting with the revelation it opened millions of fake accounts for customers. The public’s scorn has taken a toll on the stock and prompted longtime CEO John Stumpf to resign. Buffett praised Stumpf’s successor, Tim Sloan, for stepping into the role and backed him until he stepped down last year amid criticism that the firm wasn’t addressing lapses quickly enough. When the hunt began for another successor, Buffett told the Financial Times the board shouldn’t hire someone from a Wall Street firm such as JPMorgan Chase & Co. or Goldman Sachs Group Inc.
But the board chose Scharf. He had made his name at JPMorgan’s retail arm before leaving to run Visa Inc. and later Bank of New York Mellon Corp., another pillar of Wall Street. Scharf agreed to join San Francsico-based Wells Fargo on the condition he could run it from his preferred home of New York.
Buffett and his longtime business partner Charlie Munger stayed relatively mum on Scharf’s appointment.
Then, three weeks into Scharf’s tenure, a Berkshire regulatory filing showed it had quietly cut its stake to less than 9% some time in the prior quarter. In February, Munger called the arrangement letting Scharf work from New York “outrageous.” When an interviewer asked Buffett that month why he was selling Wells Fargo, he said he had to pare the stake below 10% for regulatory reasons — then acknowledged without explanation that he had gone further.