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Wells Fargo Takes on Goldman Sachs

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At a time when some legislators are blaming the breakdown in the separation of commercial and investment banking for the credit crisis, California lender Wells Fargo (NYSE: WFC  ) is set to bulk up the securities business it inherited from Wachovia. What will this mean for investors?

A new "universal bank"
The decision effectively creates a new "universal bank," similar to JPMorgan Chase (NYSE: JPM  ) and Citigroup (NYSE: C  ) , at a time when investors and regulators are debating the efficacy of this model. Furthermore, it positions Wells to compete directly with powerful, entrenched franchises: Goldman Sachs (NYSE: GS  ) , Morgan Stanley, and Bank of America Merrill Lynch (a unit of Bank of America (NYSE: BAC  ) ).

For shareholders of Wells Fargo -- such as me -- this decision raises some concerns. The securities business can be wonderfully profitable, but it is also highly oligopolistic, with the top firms earning the king's share of profits and ready to defend their franchises tooth and nail. Furthermore, investment banking is an entirely different culture from the comparatively staid world of commercial banking. The history of commercial bankers trying to integrate and manage investment banks is littered with corpses.

On the bright side, Wells Fargo has made it clear that it will focus on lower-risk, customer-driven businesses -- it won't rely on trading for its own account for profits. Goldman Sachs, by contrast, earns a significant share of its profits from principal activities.

What would Warren think?
Still, I have to wonder how Wells Fargo's largest shareholder, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , feels about this development. Buffett found out firsthand how difficult it is to manage investment bankers and traders when he steered Salomon Brothers through a Treasury bid-rigging scandal in the early '90s, in what was arguably the most stressful episode of his career.

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Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (18)

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  • Report this Comment On July 06, 2009, at 4:57 PM, Melaschasm wrote:

    If Wells Fargo focuses on the underserved lower risk side of the industry, they should be able to carve out a nice niche.

    During the good times, the higher risk competitors will laugh at Wells lower profit margins, but during the bad times, Wells will not be one of the investment banks that goes under.

  • Report this Comment On July 07, 2009, at 11:53 AM, jdcarcollector wrote:

    I think this move is being misunderstood. Wells Fargo's "entry" into the business is via Wachovia which means 16,000 retail brokers (top distribution channel) and an established research/investment banking platform. The focus is expanding the relationship with existing customers (e.g., someone who already borrows $100MM from Wells Fargo) to get their I-Banking business that was previously being 'lost' to other firms like a Goldman.

    Goldman is a publicly traded hedge fund that happens to do some I-banking in situations where they don't need to commit any capital... the highest margin business of all -- just selling advice.. but this is a tough business and thus its volatility -- companies need capital and advice.

    This is low-hanging fruit for Wells.

  • Report this Comment On July 07, 2009, at 1:20 PM, TMFAleph1 wrote:


    Thanks for your comment, which is a useful counterpoint to my article.

    One correction, though -- advisory is typically less volatile than principal activities.

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