Buffett Inches Toward Wells Fargo Exit as Scharf Sets Course

(Bloomberg) - Warren Buffett is not known for asking many companies that he buys stocks from. Last year, as a top investor in Wells Fargo & Co., he publicly advised the board not to hire a Wall Street leader - and he did.
What followed shows what can happen if a company rejects the legendary investor's advice. Buffett's Berkshire Hathaway Inc., which has already cut its stake in Wells Fargo to meet a 10% regulatory limit, began cutting further last year when Charlie Scharf was named chief executive officer of the bank and eventually most of it discharged. In a few weeks, Wells Fargo shareholders will know if Buffett has completely pulled out.
The sale was already a marked retreat: Buffett praised Wells Fargo for three decades, making it at times the conglomerate's largest equity investment, making it the bank's main shareholder. He stuck to the financial crisis of 2008 and presented it at the festive annual meeting of his company, at which even family members were extradited in one of the bank's legendary stagecoaches.
The drama is now building as Scharf prepares to lay out his vision for reversing the scandal-ridden lender, whose shares have plummeted 57% this year. Leaving Buffett Wells Fargo in his portfolio would bring the new strategy to the fore - which could potentially help Scharf sell his plan to other investors.
However, if Buffett leaves entirely, "it will be a major disadvantage for Wells," said Paul Lountzis, who as president of Lountzis Asset Management oversees investments, including interests in both companies. "It's the opposite of a seal of approval. And you certainly don't really want that."
Buffett did not reply to messages seeking comment. A Wells Fargo spokesman declined to comment.
Chances are, Scharf kept Buffett happy when he arrived in Wells Fargo last October.
Wells Fargo has been plagued by scandals for four years, starting with the revelation that millions of fake accounts have been opened for customers. The public's contempt weighed heavily on the stock and led long-time CEO John Stumpf to resign. Buffett praised Stumpf's successor, Tim Sloan, for getting into the role and supported him until he resigned last year, under criticism that the company didn't fix bugs quickly enough. When the search for another successor began, Buffett told the Financial Times that the board of directors should not hire anyone from a Wall Street firm such as JPMorgan Chase & Co. or Goldman Sachs Group Inc.
But the board decided in favor of Scharf. He made a name for himself at JPMorgan before running Visa Inc. and later the Bank of New York Mellon Corp., another pillar of Wall Street. Scharf agreed to join Wells Fargo of San Francsico on condition that he could operate it from his preferred home in New York.
Not visit
Buffett and his longtime business partner Charlie Munger remained relatively mothers with Scharf's appointment.
Then, three weeks into Scharf's tenure, a regulatory filing from Berkshire showed the stake had been tacitly lowered to less than 9% in the previous quarter. In February, Munger described the agreement to let Scharf work from New York as "outrageous". When an interviewer asked Buffett this month why he was selling Wells Fargo, he said he had to cut the stake below 10% for regulatory reasons - and then admitted without explanation that he had gone further.
During Wells Fargo's six month search for a leader, Scharf was seen as one of the few highly skilled underdogs able to take over the contested bank. Since joining, he has dealt extensively with the bank's problems and regulators' concerns.
Nonetheless, he did not maintain his predecessor's practice of visiting Buffett regularly at his headquarters in Omaha, Nebraska, according to persons aware of the situation. However, Scharf was only on duty for a few months when the coronavirus pandemic broke out and turned most trips upside down.
In Scharf's first year on Wells Fargo, investors were repeatedly reminded that the problems are far from over. The bank remains below a Federal Reserve's asset cap that has hurt earnings since 2018. That year, Wells Fargo cut its dividend 80% and reported its first quarterly loss in more than a decade. Its stocks have underperformed all other lenders in the KBW Bank Index over the past six months.
Speaking on a conference call with analysts this week, Scharf said his team had mapped out a number of steps that need to be taken over the coming years to streamline management, improve operations, and simplify product offerings. He promised to provide more details when the company releases annual results in January.
"I would expect that we not only give you a cost outlook, but also an update on how we think about the different companies," he said. This includes speaking "about the things that belong and do not belong".
Buffett was highly exposed to the financial sector at the start of the pandemic and had around 41% of his stock portfolio in banks, insurance and financial holdings at the end of 2019. The conglomerate trimmed its holdings in JPMorgan, Goldman Sachs, and PNC Financial Services Group Inc. But as this year began, its stake in Wells Fargo was in a different league - worth more than the other three combined.
At the end of 2019, Berkshire's 323 million Wells Fargo shares had a market value of $ 17.4 billion. As of mid-August, Berkshire only had about 136 million of them, currently valued at about $ 3.1 billion. The conglomerate is expected to present an update of its involvement in an approval application in mid-November.
"Warren Buffett clearly has less confidence in the future price of Wells Fargo, in the possible future performance of his stock," said David Kass, professor of finance at the University of Maryland's Robert H. Smith School of Business, in an interview. "He might see that there is a much greater risk than he initially anticipated."
Still, Buffett is optimistic about one lender: Bank of America Corp. regulators. gave Berkshire the green light this year to build a stake greater than 10%. In July and August, he bought more shares in the bank, cementing his place as Berkshire's second largest common stock holding, after Apple Inc. Buffett and the bank's CEO Brian Moynihan, often publicly praised himself.
(Adds company comments in the sixth paragraph.)
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