After American Express shareholders got burned by the salad oil scandal in 1963, in which inventories of salad oil dressing were literally watered down and falsified as a secured asset, the company itself overhauled its internal processes to avoid future fraudulent activity, seemingly taking to hear the notion “Fool me once, shame on you. Fool me twice, shame on me.”
In more recent memory, Chipotle the business had to deal with the fallout after E Coli and all his little minion friends started showing up in the burritos, prompting hundreds of millions of dollars into food quality assurance in response.
Usually, when an internal control at a large publicly traded company with a vested institutional shareholder base is proven insufficient, the response is to deploy such extensive resources to the area of failure to overcompensate for the failure and ensure that it does not happen again.
I call this the “Ocean-Traveling Became Safer Because The Titanic Sank” mental model in that, due to the response to the Titanic sinking, the future behaviors of the maritime ship-building industry greatly improved to include twenty-four hour hotlines, secondary power sources, the extensions of the double bottoms of ships, and the retrofitting of bulkheads to become more fully watertight. Those policy changes, which improved the safety of marine travel, may not have occurred otherwise.
At the 2018 Berkshire Hathaway shareholder meeting, a shareholder cited Warren Buffett’s maritime quote that: “If you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks” to support the argument that Warren Buffett should divest of Berkshire’s $30 billion stock position in Wells Fargo.
Even though her understanding of how to harness human nature is flawed, Senator Elizabeth Warren had a point when she said that the $400 million fine levied on Wells Fargo for its fraudulent account-opening practices doesn’t, by itself, have a lasting effect on the company’s bottom line.
After all, Wells Fargo is one of only twenty companies in North America that earns more than $20 billion per year in net profits. In the case of Wells Fargo, it earns profits of $24 billion annually, or $2 billion per month. In that regard, the $500 million fine is the equivalent to being fined a week’s worth of profits in 2018.
The notion that Berkshire should sell Wells Fargo is laughable because people who are actively being drowned in cash dividends don’t usually care about vague perceptions of risk created by sensationalist news headlines. By this time next year, Berkshire will be collecting $1 billion in dividends from its ownership of WFC stock. There is literally an almost $250 million check that gets sent from Wells Fargo’s corporate coffers to Berkshire’s Citigroup-administered bank account in Omaha every 90 days.
I think it shows an immense amount of financial illiteracy, or at the very least, a susceptibility to being scared by online headline writers that get more page views by drumming up explosive emotions, to suggest that Buffett should do anything other than hold onto those Wells Fargo stock certificates for dear life.
Wells Fargo is earning enormous profits. Only a third of those profits are being mailed out to shareholders, giving the company immense room for stock repurchases and other bank acquisitions. The recent $500 million fine was de minimis in light of Wells Fargo’s earnings power. And likely, Wells Fargo should be better behaved going forward because a spotlight has been shown upon its deceitful business practices, and most of those involved are now no longer with the company. Wells Fargo is just pounding out cash, and with interest rates primed to rise, the dollars pouring out will make some think that Wells Fargo is administering its own printing press. The grilling of Warren Buffett for holding onto Wells Fargo stock is a bit silly–Wells Fargo stock has turned $10 billion of Berkshire’s capital into $30 billion, is adopting better practices, and the fine amounts have been of the size and scope that are the equivalent of receiving a parking ticket.