Is Warren Buffett quietly selling his stake in Wells Fargo?

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The ultimate day of reckoning is coming for Wells Fargo(NYSE: WFC), and the impact on the value of its shares could be substantial. In two-and-a-half weeks, investors in the nation's third biggest bank by assets will learn if Warren Buffett has decided to stick with the bank in the wake of its massive fake-account and employee-retaliation scandal.

Will comment in November...

While the scandal was first reported by The Los Angeles Times in December of 2013, it wasn't until September of this year that the extent of it became widely known. That was the day the Consumer Financial Protection Bureau announced that it had fined Wells Fargo $100 million for opening millions of accounts for customers, without customers' consent. It was the largest penalty assessed by the CFPB in its five-year history.

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Warren Buffett through the years
Investor Warren Buffett answers reporters' questions during a press conference to announce that Walt Disney will buy Capital Cities/ABC July 31.
Billionaire investor Warren Buffett of Omaha makes a rare public appearance during an autograph session outside Borsheim's Jewelry Store in Omaha, May 4. Buffett was signing autographs for shareholders in his company, Berkshire Hathaway, which is having its annual meeting May 5.
Billionaire businessman Warren Buffett sits with his wife Susan (R) and daughter Susie, prior to the annual Berkshire Hathaway shareholders meeting in Omaha, May 5. This marks a rare public appearance for the reclusive Buffett.
Arnold Schwarzenegger, Republican candidate for governor of California in the October 7, 2003 recall election listens as world famous investor, Warren Buffett (L), one of his financial advisors, speaks to reporters after a meeting of Schwarzenegger's Economic Recovery Council in Los Angeles August 20, 2003. REUTERS/Fred Prouser FSP
Billionaire financier Warren Buffett looks on after a meeting with U.S. Senator Arlen Specter (R-PA) and chairman of the Senate Judiciary Committee, at the Hart Senate Office Building on Capitol Hill in Washington June 29, 2005. Specter is the co-author of a bill seeking to create a $140 billion asbestos compensation fund. REUTERS/Shaun Heasley SH/TC
Billionaire Warren Buffett arrives at the Sun Valley Resort in Sun Valley, Idaho July 10, 2007. The world's biggest media chiefs gather this week at the 25th annual Allen & Co. conference at the resort starting today. REUTERS/Rick Wilking (UNITED STATES)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at a Senate Finance Committee hearing about "Federal Estate Tax: Uncertainty in Planning Under the Current Law" on Capitol Hill in Washington, November 14, 2007. Billionaire Buffett warned of widening U.S. income disparity and endorsed the estate tax as a check on wealth accumulation, while two senior lawmakers said they want the tax repealed. REUTERS/Jason Reed (UNITED STATES)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett greets shareholders during the Berkshire Hathaway Annual Shareholders meeting in Omaha, Nebraska May 3, 2008. REUTERS/Carlos Barria (UNITED STATES)
Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar (UNITED STATES BUSINESS)
Berkshire Hathaway Chairman Warren Buffett kisses his ukulele at the Berkshire Hathaway annual meeting in Omaha May 1, 2010. Buffett played "I've Been Working on the Railroad." REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS TRANSPORT)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett (L) and Microsoft founder Bill Gates gesture at the national launch ceremony for the BYD M6 vehicle in Beijing September 29, 2010. Chinese battery and car maker BYD, backed by Buffett, launched its first premium multi-purpose vehicle (MPV) in Beijing on Wednesday to tap rising demand in the world's biggest auto market. REUTERS/Jason Lee (CHINA - Tags: TRANSPORT BUSINESS)
Billionaire Warren Buffett, wearing a traditional tikka or a red mark on the forehead, speaks during a news conference in Bangalore March 22, 2011. Buffett on Tuesday said he is looking to invest in large countries like India, China and Brazil, but added that restrictions on foreign ownership in India's insurance industry could be a deterrent. Buffett also said and the U.S. economy was improving and that the devastating earthquake in Japan would not hurt global growth. REUTERS/Stringer (INDIA - Tags: BUSINESS)
Berkshire Hathaway Chairman Warren Buffett tours the floor of the New York Stock Exchange September 30, 2011. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)
Berkshire Hathaway chairman Warren Buffett holds his hand over his heart during the singing of the national anthem, at the start of a 5km race sponsored by Brooks Sports Inc., a Berkshire-owned company, in Omaha May 5, 2013, a day after the company's annual meeting. Buffett at the meeting on May 4, 2013 gave the most extensive comments to date about the future of Berkshire Hathaway Inc after he is gone, saying he still expects the conglomerate to be a partner of choice for distressed companies. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS SPORT ATHLETICS)
Warren Buffett, Chairman of the Board and CEO of Berkshire Hathaway, poses for a portrait in New York October 22, 2013. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS)
Roberta Buffett Elliott sits with her brother Warren Buffett as they attend an announcement ceremony at Northwestern University in Evanston, Illinois, January 28, 2015. The sister of financial investor Warren Buffett has given Northwestern University more than $100 million to create the Roberta Buffett Institute for Global Studies, the largest single gift in the school's 164-year history, the university said on Wednesday. REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EDUCATION SOCIETY)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women's Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo
Warren Buffett, chairman and CEO of Berkshire Hathaway, smiles before speaking with Bill Gates (not pictured), at Columbia University in New York, U.S., January 27, 2017. REUTERS/Shannon Stapleton
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Together with fines from the City and County of Los Angeles, as well as the Office of the Controller of the Currency, Wells Fargo paid $185 million to the various agencies. This is a drop in the bucket compared to the $5.5 billion or so that the bank earns on a quarterly basis, but the reputational damage inflicted on Wells Fargo has contributed to the loss of more than $20 billion worth of market value.

WFC Market Cap Chart

WFC Market Cap data by YCharts.

Buffett declined to comment on the situation in the immediate aftermath of the scandal, saying that he'd wait until November to do so. However, he subsequently went on the record to quash rumors that he had spoken to Wells Fargo's board of directors calling for a "radical transformation of the bank's ethics," as claimed by Douglass Kass of Seabreeze Partners Management.

Buffett, who oversees Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) 10% stake in the California-based bank, responded by saying that wasn't true. "It's dead wrong to imply I've spoken to the board directly. Going to the board implies I've gone around [Wells Fargo CEO John] Stumpf, the guy who is under fire," Buffett told CNBC. "I've talked to no one else on the board."

Stumpf is now long gone. But there's reason to believe that this might not have been enough to appease the Oracle of Omaha.

Buffett's silence is deafening

Buffett's refusal to come to Wells Fargo's defense speaks volumes. He's had glowing things to say about the bank in the past, and particularly in his 1990 letter to Berkshire Hathaway shareholders, which laid out his rationale for investing in the bank in the first place.

He's also heaped praise on other banks that have come under siege since the financial crisis. The most analogous case was Bank of America(NYSE: BAC), in which he invested $5 billion worth of Berkshire Hathaway's money in 2011, at the nadir of the North Carolina-based bank's financial crisis-related troubles.

"Bank of America is a strong, well-led company, and I called [CEO Brian Moynihan] to tell him I wanted to invest in it," Buffett said in a statement at the time. "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."

More recently, Buffett weighed in last year when Bank of America's shareholders were faced with the decision of whether to split the roles of chairman and CEO, both of which were (and continue to be) held by Moynihan. "If I could vote, I would vote as management suggests, which is to have Brian take on the CEO and chairman job," Buffett told CNBC in September 2015. "He took a company that was just a terrible mess," and turned it around, said Buffett.

Given this, Buffett's silence on Wells Fargo is deafening. This is especially true when you consider how adverse he is to being associated with any kind of scandal.

Lose a shred of reputation, and I'll be ruthless

Years ago, he was investigated by the Securities & Exchange Commission, which had become suspicious of the haphazard way that Buffett and now-vice chairman of Berkshire Hathaway Charlie Munger had structured intermingled holdings between their investment vehicles. Both were cleared of any wrongdoing, but it taught Buffett the importance of avoiding scandal.

He got a second lesson in the early 1990s by way of his investment in Salomon Brothers, which was caught rigging the U.S. Treasury bond market. It was during Congressional hearings into the scandal that Buffett, who had reluctantly taken the helm at Salomon Brothers to steer it through the crisis, uttered his now infamous warning to those who work for him: "Lose money for the firm, and I'll be understanding. Lose a shred of reputation for the firm, and I will be ruthless."

Source: C-Span, via YouTube.

This goes a long way toward explaining why Stumpf is no longer with Wells Fargo. After Stumpf's first public comments on the scandal, made on Jim Cramer's Mad Money, Buffett told Stumpf that the problem at the bank was bigger than Stumpf seemed to think. Buffett is also purported to have told Stumpf that the size of the CFPB's fine "was not a metric to use in determining public reaction."

It's clear now that Buffett was right. In the intervening time, not only have we learned that Wells Fargo's fraud systematically targeted the most vulnerable members of society -- elderly people living on fixed incomes, young customers with no knowledge of banking, and immigrants who spoke little English -- but we've also come to find out that the bank retaliated against employees who had been blowing the whistle on the scandal for years.

Given this, you'd be excused for thinking that Warren Buffett will follow the same playbook that he did with Salomon Brothers -- to cut and run as soon as he gets an opportunity.

So, why wait until November?

This brings us to the most important question: Why would Buffett wait until November to share his opinion on Wells Fargo's scandal? He is, after all, the single largest shareholder in the bank.

One reason may be that Buffett wanted to see how events unfolded, to get a better sense for the reputational damage suffered by the bank. This is reasonable, though it doesn't preclude the possibility that Buffett is using the time to unload his shares, as things have only gone from bad to worse on this front.

A second, albeit related reason may be that Buffett needed time to quietly sell Berkshire Hathaway's 10% stake in the bank prior to publicly disclosing the conglomerate's holdings in the middle of next month in its 13F filing. Any insinuation that he's doing so would cause the bank's shares to plummet, thereby impairing the value of Berkshire's holding. Consequently, it makes sense that Buffett would choose to do so quietly -- just as he does when he's acquiring an interest in a company,

Further fueling suspicion that Buffett could be in the process of doing this very thing are comments from Wells Fargo's new CEO Tim Sloan. Here's an excerpt of what he told employees earlier this week: "You also should expect more tough headlines, as additional accountability actions occur, and other investigations and reviews are completed. Some of that is going to be very painful for us."

To say that "additional accountability actions" are on the way and that some of them will be "very painful," could certainly lead one to conclude that he's referring to, among other things, news that Buffett is abandoning the bank. This is speculation, of course, but it certainly doesn't seem unreasonable.

In short, investors in Wells Fargo should steel themselves for the worst next month. If Buffett decides to stick with the bank, there's likely to be little response. But if his 13F shows that Berkshire Hathaway has decided to cut ties with Wells Fargo, it could get ugly.

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