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Opinion: It's strike three for Warren Buffett as Wells Fargo faces investigation

By Jonathan Rochford

Published: Sept 23, 2016 1:12 p.m. ET

Two other incidents lead to questions about the billionaire investor's wholesome reputation


Jonathan *Rochford

Billionaire investor Warren Buffett is famous for his "front-page-of-the-newspaper test."

In a recent interview with Bloomberg, he described it, simply, as not doing anything he would be embarrassed to have written up on the front page of the newspaper. To encourage ethics over profits, he tells his managers: "Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless."

However, three recent incidents have brought Buffett to the front page of the newspaper, damaging his previously wholesome and folksy reputation.

*Strike one* is Berkshire Hathaway subsidiary Clayton Homes being profiled for predatory lending . Buffett defended Clayton Homes at the Berkshire Hathaway BRK.B, -1.04% annual meeting and in the annual letter to shareholders . Rather than responding directly to the accusations or laying out changes that would be made, he tried to highlight the positives of the business.

The fact that Buffett can't even say something bland like "Wells Fargo has done the wrong thing and it must make changes" speaks volumes.

*Strike two* for Buffett has been numerous articles on the aggressive, but legal, tax maneuvers undertaken by Berkshire Hathaway. Buffett has publicly advocated for higher taxes on high-income individuals. The "Buffett Rule " was named after him when he suggested in 2011 that individuals earning more than $1 million should pay an effective tax rate of no less than 30%. That's a laudable goal, but it wouldn't mean that much for Buffett, as the vast majority of his wealth is tied up in Berkshire Hathaway shares.

Berkshire Hathaway is not unlike most companies in that it legally seeks to minimize taxes. To be fair, it certainly isn't as bad as some technology companies, like Apple AAPL, -1.67% in tax-avoidance strategies, which is due to the fact that its income is predominantly earned in the U.S. But it does stand out for its $61.9 billion of deferred tax liabilities, which Buffett has described as akin to an interest-free loan from the U.S. government. Berkshire Hathaway doesn't pay dividends, and Buffett has noted a key reason is that shareholders would have to pay taxes on any dividends. It has participated in a tax-inversion acquisition as well as asset swaps, which also helped avoid taxes. As Forbes noted , Buffett's preaching on taxes should be taken with a pinch of salt.

The *third strike* for Buffett is the Wells Fargo WFC, +0.04% scandal. Over two million accounts and credit cards were established without client consent. Once the accounts were opened, customers were billed for various fees on the unauthorized accounts. Low-level staff did this as they feared they would lose their jobs if they failed to hit the unrealistic cross-selling targets set by senior management. A total of 2% of Wells Fargo's workforce has been fired for involvement in the practices that date back at least five years.

Worse than the fraudulent activities themselves is that the behavior was systemic and widely known. The behavior was so widespread that management ordered staff to undergo training, in which they were told that it was wrong to open accounts without customer permission. Yet by continuing to insist that unrealistic targets had to be met, they gave employees a green light to continue the misconduct.

Senior management can't claim it didn't know. At least one employee emailed the CEO directly highlighting the problems. Employees who called the internal whistleblower hotline were systematically fired, with their managers given coaching on how to invent reasons for their dismissal . Retaliating against whistleblowers is illegal in the U.S., so the problems with regulators are only just beginning for Wells Fargo.

Berkshire Hathaway is the largest owner of Wells Fargo shares, with 9.45% of the stock. Buffett has previously praised Wells Fargo saying it is an above-average bank in its conduct and culture. Buffett has been repeatedly asked for comment on the scandal but has refused to say anything until November . The fact that he can't even say something bland like "Wells Fargo has done the wrong thing and it must make changes" speaks volumes.


Warren Buffett and Berkshire Hathaway are legendary for the returns they have generated for investors. In the 51 years since Buffett assumed control of the company, Berkshire Hathaway's stock has outperformed the S&P 500 Index by 11.1% a year , although the outperformance has fallen away in the past decade. Similarly, Buffett's previously stellar reputation for ethical conduct has fallen away in recent years. This arguably started in 2011 when key lieutenant David Sokol resigned after front-running Berkshire Hathaway on the takeover of Lubrizol. In this instance, Buffett apologized to shareholders and accepted blame for his part in the problems.

In the past two years, Buffett has suffered three strikes to his reputation. The predatory lending at Clayton Homes, aggressive tax practices at Berkshire Hathaway and its subsidiaries, and the recent revelations of misconduct at Wells Fargo are all black marks. In each case, Buffett has either failed to denounce the wrongdoing or has endorsed the dubious behavior. Buffett and Berkshire Hathaway now seem to live by the motto "Do as I say, not as I do," instead of adhering to the front-page-of-the-newspaper test.

/Jonathan Rochford is a portfolio manager at Narrow Road Capital , which specializes in high-yield and distressed credit. /

Post Comment

Newest| Oldest Dave Coe 5ptsuserFeatured // 8 minutes ago

I thought I'd ask a few questions to better understand this problem.

Yes, it is upsetting that Wells Fargo had such an extensive problem with fraudulent account setup for many years, however, one must not overlook that the External Auditors, Internal Auditors and Regulators for year's hadn't identified this problem.

Although, the auditor's might argue that they only sample, which doesn't allow them to catch all fraud, this problem was so extensive, that I ask if the Audit Partner on the job shouldn't be fired along with the CEO of the bank, and if the Auditor's should be removed from this client?

Let's then ask if the Chief Risk Officer, Chief Internal Auditor and Chief Compliance Auditor shouldn't also lose their jobs and what about their designations? Doesn't the CPA Board have anything to say about the people holding these designations?

Then let's think about the regulators who are only now asking the tough questions. Sarbanes Oxley was implemented in 2002, what happened to the SOX regulators?

It seems too easy to blame the CEO of the Bank but if we're really going to see some change, shouldn't we also fire the Regulators that for years didn't catch this problem?

Now we as tax payers also elect these senators to actually do something about these types of problems. We've had rule changes after rule changes after rule changes. But shouldn't some of these Senators who've done absolutely nothing also go to jail?

Just thought I'd ask anyone some questions about who really is to blame for this and other fiascos of this nature after having spent so much tax payer money to pay for government rule changes that didn't catch yet another fraud for years.

louis tan 5ptsuserFeatured // 45 minutes ago

Like a cult following it has always been a myth.

Bill Lemsky 5ptsuserFeatured // 54 minutes ago

Warren Buffett is a downright pirate. A legal pirate, but a pirate nonetheless.

He'll do an occasional interview with Becky Quick and act all grandfatherly.

He is smart enough to leave his sabre, bandana, eyepatch and parrot in the closet when he's in public. But make not mistake, Warren is a pirate!

Bill Lemsky 5ptsuserFeatured // 52 minutes ago

By the way, ask him where he stands on leveling dividends and capital gains as ordinary income. Let's eliminate the carry trade.

If you did so, his head would explode and that would be the end of Warren.

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Published October 12, 2016 Associated Press

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SAN FRANCISCO --- Wells Fargo's embattled CEO John Stumpf has resigned, effective immediately, as the nation's second-largest bank is roiled by a scandal over its sales practices.

The San Francisco bank said Wednesday that Stumpf will also relinquish his title as chairman. Its chief operating officer, Tim Sloan, will succeed Stumpf as CEO.

Stumpf had led Wells Fargo since 2007.

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