Wells Fargo & Co (NYSE:WFC) will eliminate all product sales goals in retail banking next year as part of its response to its fake accounts scandal. That’s good news for consumers and probably salespeople as well, but it can only do so much for WFC stock in the short-term.
Wells Fargo stock was having a rough year even before the jaw-dropping revelation that thousands of upon thousands of sales people had opened millions of accounts in customers’ names without their knowledge.
The scale of the deception was so vast that it was immediately clear that the company’s incentive system bears a large part of the blame. With their jobs on the line, lower-level WFC employees did what it took to make their numbers.
That’s not an excuse in any way for their behavior, but the blame ultimately lies with Wells Fargo. Eliminating sales goals helps ensure that the bank doesn’t have another such scandal.
It’s also important for optics. WFC needs to be seen moving swiftly and decisively to address the problem.
But it doesn’t help Wells Fargo stock. It certainly does nothing for WFC’s once-sterling reputation as the “cleanest” of the big banks. In fact, Wells Fargo will never get its name back in quite the same way.
Forget about the $185 million in fines it paid to regulators or the $5 million it paid to affected customers. That’s not material to a bank as big as WFC.
That’s not why Wells Fargo stock is wavering on the news.
WFC and Warren Buffett
One of the reasons why WFC gets the highest price-to-book multiple of the big banks is because of its reputation. Remember: Wells Fargo is Warren Buffett’s favorite bank. It’s Berkshire Hathaway Inc.’s (NYSE:BRK.A, NYSE:BRK.B) single largest holding. Indeed, BRK owns more than 2 million shares worth about $23 billion. That’s nearly 10% of the nation’s biggest bank by market cap.
Warren Buffett’s imprimatur mattered to how much the market was willing to pay for WFC stock. It was a small part of the story, of course, but it mattered.
Buffett once said, “If you lose money for the firm, I will be understanding. If you lose reputation, I will be ruthless.”
Why does it feel like there could be another really big shoe to drop?
If there’s an upside, it’s this: It’s more difficult to lose a good reputation than it is a bad one. And it’s not like banks can’t be solid investments after such incidents. In the last handful of years, we’ve had JPMorgan Chase & Co.’s (NYSE:JPM) London Whale embarrassment and Bank of America Corp’s (NYSE:BAC) debit-fee uprising and stress-test error.
Or just look at the very existence of Citigroup Inc (NYSE:C).
These sorts of scandals have a way of receding from public memory. If anything, they disappear from investors’ and Wall Street’s memory too fast.
It will be very interesting to see what Uncle Warren has to say about Wells Fargo. That could change the equation.
For now, however, there’s no compelling fundamental reason to sell WFC stock over this scandal or the elimination of sales goals.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
