Wells Fargo Investment Bankers Bringing Buffett-Assisted Revenue
The sun was rising over San Francisco’s financial district in November 2009 when Richard Kovacevich picked up the phone in his 12th-floor office to call Omaha, Nebraska.
It was about a year after Wells Fargo & Co. and Kovacevich, the bank’s chairman at the time, had announced a plan to purchase Wachovia Corp., and now he was reaching out to Warren Buffett for help, Bloomberg Markets magazine reports in its March issue. Just days before, Buffett had heralded his own acquisition of railroad Burlington Northern Santa Fe Corp. for $26 billion.
The billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A) had lined up JPMorgan Chase & Co. (JPM) for financing, Kovacevich recalls. Berkshire also is Wells Fargo’s largest shareholder. The two men spoke for no more than 10 minutes, Kovacevich says, and the banker’s message was simple.
“Here we are, our largest shareholder, and we had never done any meaningful investment banking for him,” recalls Kovacevich, 68, who stepped down as chairman in 2009 but continues to consult with management and represent the company to customers. “I called him and said we’ve got some great bankers here now, this is important and we’d really like to show you what we can do.”
The phone call marked a turning point for Wells Fargo, founded in 1852 to serve gold rush pioneers. Far from Wall Street, the bank, the fourth-largest in the U.S. by assets and the biggest by market value, had long rejected the more volatile and transaction-oriented culture of investment banking. In 2005, Kovacevich, then also CEO, said having superstar bankers focused on one-time deals was “incompatible” with his company.
Now, Wells Fargo, which avoided most of the mortgage- related mistakes made by the largest investment banks, is pushing into the business it once shunned, even as rivals facing fickle markets, meager revenues and new restrictions scale back.
Financial firms worldwide announced plans last year to cut more than 230,000 jobs as global stock offerings plunged 29 percent and U.S. bond issuance fell 6.8 percent, according to data compiled by Bloomberg.
The move may help Wells Fargo, led since 2007 by CEO John Stumpf, weather head winds facing commercial banks. Firms are struggling to find growth as rules limit overdraft and debit card fees and lending remains sluggish.
Wells Fargo said third-quarter revenue fell to $19.6 billion from $20.4 billion in the second quarter, missing analysts’ estimates. The stock dropped as much as 8.9 percent on Oct. 17 when the results were announced and was down 11 percent for 2011. Still, the bank has been profitable for 12 consecutive quarters through the three-month period ended on Dec. 31, setting records in the past six. It reported net income of $15.9 billion in 2011.
“The government has really limited their ability to grow their operations, so I can understand why they are trying to move out of traditional banking, but it’s a tough thing to do,” says William Frels, CEO of St. Paul, Minnesota-based money manager Mairs & Power Inc., which held more than 3.6 million Wells Fargo shares at the end of September. “It’s not a positive. My take is that they are desperate to find new avenues of growth.”
After Kovacevich’s call, Buffett added Wells Fargo to the Burlington deal. The bank has gone on to manage Burlington bond issues and in January 2011 helped underwrite Berkshire’s $1.5 billion debt offering. Buffett declined, through a spokeswoman, to comment.
‘Landscape Has Changed’
“Before the crisis, we would have had to compromise both our culture and ethics in order to compete,” says Kovacevich, who, during an almost 35-year banking career that began at Citicorp, pursued his own agenda in defiance of industry trends.
His refusal to engage in the empire-building of peers such as Citigroup Inc.’s Sanford Weill and Bank of America Corp. (BAC)’s Kenneth D. Lewis earned him a reputation as a maverick. The collapse of Lehman Brothers Holdings Inc. and the sales of Bear Stearns Cos. and Merrill Lynch & Co. in 2008 led Kovacevich and Stumpf to rethink their stance.
“The landscape has changed,” says Stumpf, 58. “Some of the pure investment banks, like Lehman and Bear, are gone, and some of the foreign competition has retreated back to their own countries.”
Buffett’s imprimatur notwithstanding, Wells Fargo has a big hill to climb. Even insiders overlook the lender.
When Vulcan Materials Co. CEO Don James needed advice in fending off a hostile takeover in December, he didn’t turn to the bank. Instead, he chose Goldman Sachs Group Inc., which had advised the company since at least 1999. James, a former director of Wachovia, is on Wells Fargo’s board. Meghan Stafford, a spokeswoman for Vulcan, declined to comment.
The bank ranked 12th among U.S. debt underwriters in 2011, with 1,824 deals valued at $53.1 billion, behind London-based HSBC Holdings Plc and France’s BNP Paribas SA, according to Bloomberg data. In U.S. mergers and acquisitions, Wells Fargo ranked 21st, lower than boutique investment bank Moelis & Co., advising on 31 deals last year valued at $27.6 billion, the data show.
Wells Fargo also will have to convince naysayers it won’t go the way of other commercial banks that have sought to enter the investment-banking business only to retreat, says Brian Foran, a New York-based analyst at Nomura Holdings Inc. Bank of America tried expanding into investment banking with limited success until it purchased Merrill Lynch, he says.
“Investors are nervous,” Foran says. “They feel like they’ve seen this movie before.”
The man Stumpf chose to lead the investment-banking expansion is John Shrewsberry, a 6-foot-4 (193 centimeter) son of an exterminator. A former Goldman Sachs vice president, Shrewsberry has been at Wells Fargo for more than a decade.
His domain now stretches from three floors of a San Francisco skyscraper to New York and Charlotte, North Carolina, where Wachovia was based and where Wells Fargo is converting 240,000 square feet (22,300 square meters) at the 48-story Duke Energy Center into a home for 1,600 salesmen, traders and bankers.
“This gives us more capacity,” Shrewsberry, 46, says on a mid-December morning of his new West Coast aerie, walking across the 34th-floor trading space in a gray pinstriped suit, a lavender shirt and a floral-print tie as employees unpack cardboard boxes and adjust computer screens.
The space allows Shrewsberry to squeeze in 175 trading desks on each floor, an upgrade over the 135 spots and scattered operations the investment bank had at a previous location. In his office overlooking San Francisco Bay, a small collection of books lining a glass wall includes Thomas Friedman’s “The World Is Flat” (Farrar, Straus & Giroux, 1995), an accounting tome and the “Yale Book of Quotations” (Yale University Press, 2006).
Shrewsberry was an obvious choice for the job, current and former colleagues say, citing his deliberate decision-making and consensus-building. He wears a suit every day in a city where bankers and traders often dress in slacks and open-collared shirts. His athletic build has been sharpened by years of downhill skiing and basketball, which he has played at least once a week for most of the past 30 years.
“He has always been a guy that made the team better,” says Fred Terrell, vice chairman of investment banking at Credit Suisse Group AG, who hired Shrewsberry out of Yale’s business school in 1992 to work in CS First Boston Corp.’s mortgage- markets department. That’s rare in the business world, Terrell says. “It generally happens around a person who appreciates what everyone does, from the smallest person on the team to the most senior person.”
Shrewsberry attended high school in Chino, California, about 35 miles east of Los Angeles. He graduated with an economics degree from Claremont McKenna College in 1987, worked for three years as an auditor at Coopers & Lybrand and then went to Yale, where he got a master’s degree in business administration.
After the CS First Boston stint, he took a job at Goldman Sachs’s principal strategies unit. A year later, he and colleague Marc Furstein left to start their own firm. The company, American Commercial Capital LLC, was based in Carlsbad, California, and made loans to restaurant franchises. The debts were then packaged into bonds for sale to investors.
With an office about 3 miles from the Pacific Ocean, Shrewsberry honed his surfing skills, and he and his partners would sometimes wear shorts and flip-flops to the office.
By 2001, investors had grown wary of purchasing bonds backed by unconventional lending commitments, and the industry was changing to favor banks with enough capital to keep loans on their balance sheets. That May, Wells Fargo agreed to buy American Commercial. Shrewsberry stayed to run the business.
By the time of the Wachovia acquisition, Shrewsberry had worked his way up to lead Wells Fargo’s securities and investment group. He helped examine Wachovia’s books before the merger was announced and emerged as one of the most vocal champions for keeping the bank’s securities unit.
Kovacevich says his trust in Shrewsberry’s leadership helped soften his anti-Wall Street leanings. Less than two years after the merger was announced, Stumpf promoted Shrewsberry to president of Wells Fargo Securities LLC, the broker-dealer that succeeded Wachovia Capital Markets LLC, which includes both investment banking and sales and trading.
Now, Shrewsberry is looking to take advantage of a seismic shift reshaping the industry. New financial rules are forcing banks to divest some capital-intensive businesses and shutter proprietary-trading units. Regulations also require the largest U.S. securities firms, as part of bank holding companies, to be supervised by the Federal Reserve, which subjects them to scrutiny absent during the run-up to the most recent crisis, Kovacevich says. That has leveled the playing field for new entrants such as Wells Fargo.
“It became a lot more fun and worthwhile both for Wells Fargo and our customers to do more business together,” Shrewsberry says.
Wells Fargo’s strategy is to build on its commercial- banking strength, Kovacevich, Shrewsberry and Stumpf say. Borrowers, depositors and other long-time clients with underwriting and advisory needs will be referred to investment bankers, while traders and salespeople hawk securities underwritten by the bank to institutional investors and more than 15,000 advisers at the third-largest U.S. retail brokerage bring in money from customers.
“Think of a customer where we have had a lending relationship with them for 10 to 15 years and now they want to issue some debt,” Stumpf says. “Who would know that debt better than us? We’ve analyzed it, and we’ve been with them through cycles. And now we have this big retail platform that can help them sell equity or debt into the marketplace.”
The new capabilities mean Wells Fargo can expand its mission to convince existing customers to use the bank’s other services -- much as Kovacevich appealed to Buffett. At a Goldman Sachs investors conference in December, Stumpf highlighted the opportunity to pursue what he called “deepening cross sell” with the bank’s more than 6,800 corporate customers.
Such cross selling has long been the Holy Grail of bankers eager to expand their business without having to find new customers. Kovacevich helped pioneer and refine the strategy at Wells Fargo, and Citigroup adopted it as part of its financial- supermarket model before the bank wrote down tens of billions of dollars in bad subprime debt.
“Everybody talks about cross selling,” says Bert Ely, a banking consultant in Alexandria, Virginia, who has followed the industry for 30 years. “First of all, it’s hard to do. It’s even harder to measure. Wells is pretty good at it. Whether they’re better than JPMorgan or Bank of America is anybody’s guess.”
For Kovacevich, changes in the industry provided a rare opportunity to get into the business at what he considers a minimal cost. The $12.7 billion Wachovia purchase gave Wells Fargo a group of bankers ready to offer underwriting, advisory and hedging products that customers have always needed, he says.
That Wachovia’s bankers witnessed their unit’s role in the firm’s collapse and became believers in Wells Fargo’s culture only helped matters, Kovacevich says. Shrinking operations at other firms also meant fewer opportunities to jump ship.
Shrewsberry’s unit has added more than 500 people in the 22 months ended on Oct. 31, an increase of 15 percent, hiring bankers from UBS AG, Deutsche Bank AG, Leerink Swann & Co. and Chicago-based hedge fund Citadel LLC, led by Ken Griffin, which shuttered its securities business in 2011.
Wells Fargo has started getting larger mandates. Last year, Norcross, Georgia-based Rock-Tenn Co. (RKT) sought its advice and that of head industrials banker John Church in a $4.92 billion purchase of cardboard-packaging maker Smurfit-Stone Container Corp.
In October, the bank was the sole adviser to Targus Information Corp., the maker of CallerID, in its $650 million sale to Neustar Inc. (NSR), which was completed in November. The lender also has won debt-underwriting business for Cisco Systems Inc. and Hewlett-Packard Co.
The bank has done better in U.S. loan syndications, where it ranked fourth last year, and U.S. leveraged loans, where it was third behind Bank of America and JPMorgan, according to Bloomberg data. Loan-syndication volume jumped 72 percent in the third quarter from the first compared with growth of 4 percent for the industry, according to a Dec. 14 report by Vivek Juneja, an analyst at JPMorgan in New York.
Shrewsberry’s unit is the fastest-growing business at Wells Fargo, according to Kovacevich and Juneja’s report. Revenue from investment-banking fees rose 27 percent in the first nine months of 2011, the company said in a presentation. Juneja estimates trading revenue at about $700 million to $900 million a quarter during the first half of 2011.
The firm, which doesn’t report financial results for its investment-banking business, has been equally guarded about specific goals. Kovacevich says he expects Wells Fargo to be among the top five U.S. investment banks in plain-vanilla products such as U.S. debt and equity underwriting.
While bank analysts such as Nomura’s Foran and Betsy Graseck at Morgan Stanley support Wells Fargo’s expansion, citing the company’s evolution from a small regional lender and its strong risk management, they don’t see the company gaining top-tier status anytime soon.
The challenge will be to build the business gradually without committing “more capital in a big, flashy way” or offering guaranteed compensation to lure high-profile bankers, Graseck says. “They will continue to be a mid-size investment bank, not one of the largest. To move into the top tier is a culture shift. Their strategy is more of a gradualist approach.”
That’s fine with Stumpf, who says Wells Fargo doesn’t expect investment banking to displace commercial lending or real estate. Kovacevich says the unit is unlikely ever to account for more than 10 percent of the firm’s total revenue or profit.
In addition to persuading CEOs to give Wells Fargo their business, the bank will have to convince investors its strategy won’t lead to lower valuations.
“The perception in the market is that investment banking is more volatile,” Graseck says. “That’s multiple-destroying, not enhancing.”
Kovacevich shakes off the criticism.
“If we had the discipline for 156 years not to be in investment banking, why would we be in it today unless we thought there was a fundamental change?” he says. “This is so simple, we just had to do this.”
Kovacevich’s nod to the past and Wells Fargo’s efforts to remember its roots are themes Shrewsberry probably won’t forget. While executives hold meetings in conference rooms named for the bank’s largest acquisitions, such as Wachovia and First Interstate Bancorp, the one nearest Shrewsberry’s office commemorates a much smaller deal, one that brought him to the bank a decade ago yet was so tiny that the details weren’t announced.
A sign attached to the frosted glass reads: “American Commercial Capital, 2001.”
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