Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

In 1991, after the wheels came off the bus at Salomon Brothers amid a bond-trading scandal, Warren Buffett traveled to Washington to testify before Congress. 

Buffett's Berkshire Hathaway had become the biggest shareholder in Salomon four years earlier when the investment bank's chief, John Gutfreund, brought in the Omaha folk hero as an investor to stave off a takeover by Ron Perelman, as Carol J. Loomis detailed in Fortune years later. As the scandal around Salomon's flouting of Treasury auction rules swelled and threatened to bankrupt the company, Buffett had been drawn further into the firm to be its interim chairman. 

In his opening remarks to a House committee, Buffett gave his philosophy on how to right the culture of the firm:

After they first obey all rules, I then want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper -- to be read by their spouses, children, and friends, with the reporting done by an informed and critical reporter. If they follow this test, they need not fear my other message to them: Lose money for the firm and I will be understanding; lose a shred of reputation for the firm and I will be ruthless.

Almost 25 years to the day, a new scandal started rocking another bank that boasts Berkshire as its main shareholder: Wells Fargo. While the wheels haven't quite come off completely, it's safe to say the lug nuts loosened a bit after the Consumer Financial Protection Bureau announced it was fining the bank because employees ginned up 2 million fake accounts to meet sales quotas. 

This scandal has nothing to do with losing money but everything to do with reputation. At first, the stock market seemed to shrug off the news. A $185 million fine? Please! That's a parking ticket when it comes to the legal bills of big banks. The shares actually rose on the day the settlement was announced. 

But the scandal has reverberated beyond the small fine and the microscopic amount of money made for the bank by the fake accounts. Perhaps that's because many consumers live in an era when financial identity theft is -- or should be -- a top paranoia for everyone. That sets it apart from all of the disorderly conduct along the mortgage-bond assembly line during the financial crisis, crimes and misdemeanors that are perhaps more abstract to a Main Street audience. 

Faked Out
Wells Fargo has lost about $15 billion in market value since it was fined by the CFPB for creating fake customer accounts
Source: Bloomberg

The market has been topsy-turvy over the past few days, so it's hard to say exactly how much damage has been done to Wells Fargo, but it's clear some is being done. The shares are down more than 6 percent in three days, wiping out about $15 billion in market value and causing Wells Fargo to cede its bragging rights as the nation's biggest bank by market capitalization to JPMorgan Chase. About $1.5 billion has been lopped off the value of Berkshire's 10 percent stake, and Berkshire's own shares are down about 2.5 percent over the same period. 

Overtaken
The drop in Wells Fargo's stock price means it's been overtaken by JPMorgan Chase as the largest bank by market capitalization
Source: Bloomberg

Some, if not much, of Wells Fargo's previous reputation was built on the fact that it was Buffett's favored bank. Just this July, Berkshire Hathaway applied to the Federal Reserve for approval to expand its stake beyond the 10 percent threshold that requires regulatory review. 

Can't Get Enough
Berkshire Hathaway has built a 10% stake in Wells Fargo and recently applied to regulators to buy more
Source: Bloomberg

Yet the relationship with Wells Fargo is complicated for Buffett for other reasons: Agencies including the Fed are examining whether legal limits are being exceeded for how much a bank can lend to entities controlled by a large owner of its stock, as Jesse Hamilton reported last month. 

The losses for Wells Fargo worsened on Tuesday as the bank eliminated the sales goals for consumer bankers that created the scandal, and questions lingered about how much the potential impact on its business will be.

“We want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers,” Chief Executive Officer John Stumpf said in a statement. 

Restoring that confidence will be a tall order, and how badly it's been shaken is an open question. Another question lingering in the air is whether Stumpf still has Buffett's full confidence. Stumpf will be the one traveling to Washington this time, after he was summoned by the Senate Banking Committee to testify at a hearing on Sept. 20.  Senator Elizabeth Warren is already questioning what senior executives knew about the scandal.  

At age 86, does Buffett have it in him to make good on those words from a quarter-century ago: "lose a shred of reputation for the firm, and I will be ruthless"? Or could he help assuage the turmoil with a few comments at one of his folksy steakhouse interviews?

It's a safe bet that the phones in Omaha have been ringing for a few days with questions from "informed and critical reporters" (and probably a few hacks, too) wondering exactly that.

So far there has been silence. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net