Buffett Speaks Out About Well Fargo’s Debacle

At the Berkshire Hathaway annual meeting this week, investor Warren Buffett addressed several serious issues related to the company’s significant investment portfolio. It is important because many times, the information Buffett shares is taken as an indication of where the economy and certain business concerns may be headed in the future.

As a major shareholder in the shares of Well Fargo Bank, Buffett felt it was appropriate to address the debacle that befell Wells Fargo leadership in September last year. As a reminder, Wells Fargo employees had for years been setting up dummy and unauthorized bank accounts in pursuit of the incentives that were available for bringing the major bank new business. With at least 2,000,000 of said accounts being issued, Wells Fargo suffered a significant hit to its reputation and its stock price when the issue became public.

According to Buffett, “There were three very significant mistakes, but there was one that dwarfs all the others.”

The first mistake the company made was setting up an incentive plan with loose controls. Eventually, it was discovered the plan was designed in such a fashion that it actually rewarded bad behavior.

The second mistake fell squarely on the management team and former CEO John Stumpf. Upon finding out about the incentive issue as early as 2012, management did very little to address the situation. In fact, the breach of normal protocol didn’t cease even after it came to Stumpf’s attention.

The third significant mistake the company made was underestimating the public impact the fraud would have on the company’s future. While management continued to treat the matter as something they just wanted to go away, the bank took a significant hit to its reputation. It was this miscalculation of public scrutiny that led to the company’s stock price taking a significant hit.

While Buffett remains bullish on the banking sector in general, his displeasure with We;; Fargo’s actions was duly noted.