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this is why Warren Buffett sold off Wells Fargo stocks at Wells Fargo you know there were three very significant mistakes but there was one that dwarfs all of the others you're going to have incentive systems at any business almost any business there's nothing wrong with incentive systems but you got to be very careful what you incentivize and you can't incentivize bad behavior and if so you better have a system for recognizing it clearly at well Fargo there was an incentive system built around the idea of cross- selling and number of services per per uh customer and the the company in every quarterly investor pres presentation highlighted how many services per customer so it was the focus of the organization a major focus and undoubtedly people got paid and graded and promoted based on on that number at least partly based on that number well it turned out that that was incentivizing the wrong kind of behavior we've made similar mistakes I mean any company's going to make some mistakes in designing a system uh but it's a mistake and you're going to find out about it at some point and I'll get to how we find out about it but the biggest mistake was that and I don't know obviously don't know the facts as to how the information got got passed up the line at Wells Fargo but it's some point uh if there's a major problem the CEO will get wind of it and that is at that moment that's the key to everything because the CEO has to act that Solomon situation that you saw happened because of on April I think 28th the CEO of Solomon the president of Solomon The General Counsel of Solomon sat in a room and they had and described to them by a fellow named John Merryweather some bad practice terrible practice that was being conducted by a fellow named Paul moer who worked for him and Paul moer was flimflamming the United States Treasury which is a very dumb thing to do and he was doing it partly out of spite because they didn't he didn't like the treasury and they didn't like him so he put in phony bids for us treasuries and all of that so on April 28th roughly uh the CEO and all the these people knew that they had something that had gone very wrong and they had to report it to the Federal Reserve Board in New York or Federal Reserve Bank of New York and the CEO John good friend uh said he would do it and then he didn't do it and he undoubtedly put it off just because it was an unpleasant thing to do and then on May 15th another treasury auction was held and Paul moer put in a bunch of phony beds again and at this point it's all over because the top management had known ahead of time and now a guy that was a pyromaniac had gone out and lit another fire and he lit it after they'd been warned that he was a pyromaniac essentially and it all went downhill from there it had to stop when the CEO learns about it and uh then they made a third mistake actually but again it pales in comparison to the second mistake they made a third mistake when they totally underestimated the impact of what they had done once it became uncovered because they there was a penalty of 185 million and in the banking business people get fined billions and billions of dollars from mortgage practices and all kinds of things I the total fines against the big Banks I don't know whether it total's 30 or 40 or billion or whatever the number may be so they measured the seriousness of the problem by the dimensions of the fine and they thought $185 million fine signals a less offensive practice than something involved two billion and they were totally wrong on that but the main problem was they didn't act when they learned about it it was bad enough having a bad system but they didn't act at burshire uh we have the main source of information for me about anything that's being done wrong at a subsidiary is the hotline now we get 4,000 or so hotline reports or that come we get Communications On The Hotline perhaps 4,000 times uh a year and most of them are frivolous you know the guy next to me has bad breath or something like that I mean it's a but but there are are a few serious ones and uh the head of our internal audit Becky amch uh looks at all those people that a lot of them come in Anonymous probably most of them uh and some of them she refers back to the companies probably most of them and but anything that looks serious you know I will hear about and that has led to action uh we put them more than once uh and we we spent real money investigating some of those we put special investigators sometimes on them and like I say it is it is uncovered certain practices that we would not uh at all condone at the parent company I think it's it's a good system I don't think it's perfect I don't know what I'm sure they've got an internal audit at Wells Fro I'm sure they've got a hotline and I don't know the facts but I would just have to bet that a lot of communications came in on that and I don't know what their system was for for getting them to the right person and I don't know who did what at any given time but that was it was a huge huge huge error if they were getting uh and I'm I'm sure they were getting some Communications and they ignored them or they just sent them back down to somebody down below uh Charlie uh you followed what what are your thoughts on it well put me down as skeptical when some Law Firm thinks they know how to fix something like this if you're in a business where you have a whole lot of people under incentives very likely to cause a lot of misbehavior of course you need a big compliance Department every big wirehouse stock brokerage firm has a huge compliance department and if we had one we would have a big compliance Department to wouldn't we Warren ABS absolutely absolutely but that doesn't mean that everybody body should try and solve their problems with more and more compliance I think we've had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust I think we have less trouble not more but we will have trouble from time to time yes of course we'll be blindsided someday Charlie says an ounce of prevention he said when Ben Franklin who he worships uh said I announce a prevention is worth a pound of cure he he understood he understated it that an oun of prevention is worth more than a pound of cure and I would say a pound of cure promply applied is worth a ton of cure that's delayed and problems don't go away John good friend said that problem originally was uh what he called it a traffic ticket he told the troops there at Solomon was a traffic ticket you know and it almost brought down a business that uh uh some other CEO that they described the problem that he had encountered as a footfall you know and it resulted in incredible damage to the institution and so it it you've got to you've got to act promptly and frankly I don't know any better system than hotlines and Anonymous letters to me I get Anonymous letters and I've gotten I've gotten three or four of them um probably in the last six or seven years that have resulted in major changes and uh very very occasionally they're signed you almost always they're Anonymous but wouldn't make any difference because there will be no retribution against anybody obviously if they call our attention to something that's going wrong but I will tell you as as we sit here somebody is doing quite a few people are probably doing something wrong at birkshire and usually it's it's very limited I mean may be stealing small amounts of money or something like that but when it gets to some sales practice like was taking place at Wells Fargo you can see the kind of damage it would do the Wells Fargo cross- selling Scandal is a creation of millions of fraudulent savings and checking accounts on behalf of Wells Fargo clients without their knowledge or consent news of this fraud became widely known in late 2016 after various regulatory bodies including the Consumer Financial Protection Bureau find the company combined $185 million as a result of the illegal activity the company faces additional civil and criminal suits reaching an estimated 2.7 billion by the end of 2018 the creation of these fake accounts continues to have Legal Financial and um reputational ramifications for Wells Fargo and former bank Executives as recently as September 2023 this is one of the wor worst scandals possibly in banking history at least in the United States of America they pretty much underestimated the impact of this particular Scandal and their particular stock and business in and of itself they fade they paid a tremendous fine but this really wasn't anything compared to the loss of reputation that Wells Fargo had and this truly is a tremendous reason why Warren Buffett basically said goodbye to Wells Fargo try to keep that all in mind when you're trying to invest in any sort of stock if you like this video remember to leave a like comment subscribe and hit the
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