In the two months following revelations of Wells Fargo's (NYSE:WFC) fake-account scandal, there was a deafening silence coming from Omaha, Nebraska, the home of the bank's biggest shareholder -- Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B).
Buffett admitted to speaking briefly with former Wells Fargo chairman and CEO John Stumpf after Stumpf's interview with CNBC's Jim Cramer in the immediate wake of the scandal. Buffett warned Stumpf not to underestimate the magnitude of the burgeoning crisis but other than that stayed silent. (Stumpf has since stepped down.)
This led me, and others, to question whether the Oracle of Omaha was using the time to surreptitiously unload Berkshire Hathaway's nearly 10% stake in Wells Fargo.
In my defense, this wasn't an unreasonable thing to think, given Buffett's past statements on scandals. In 1991, for instance, Buffett testified before Congress about an ethically analogous incident related to Berkshire's investment in Salomon Brothers, famously saying: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."
We now know, however, that Buffett hasn't unloaded Berkshire's stake in Wells Fargo.
We got the first inkling of this when Berkshire filed its third-quarter 10-Q at the beginning of this month, showing that Wells Fargo remained one of the conglomerate's four biggest holdings. This was confirmed two weeks later when Berkshire filed its 13F, revealing Berkshire's specific stock holdings and disclosing that its position in Wells Fargo hadn't declined at all.
But it was in a recent interview with CNN's Poppy Harlow that Buffett explained why he took so long to publicly comment on the controversy:
I don't think anybody has actually picked up on this. We own 500 million shares at Berkshire Hathaway [equating to just under 10% of Wells Fargo's outstanding stock]. You can't go over 10% of the shares of a bank without becoming a bank holding company unless you agree to be passive and the Federal Reserve [agrees].
We don't want to be a bank holding company. We filed in June to declare our intent to be passive, and [the Federal Reserve] still has to rule on that and it may be a few more months. In my view they'll rule [in our favor] because we are passive.
But that means passive. It means you don't talk directly to the board. I can't talk directly to the board. That is not being passive. The Federal Reserve would say at that point that you are going to be a bank holding company.
To be clear, Berkshire Hathaway doesn't intend to exceed the 10% threshold because it's buying more Wells Fargo stock -- though Buffett did say in 2009 that if he had to put his entire net worth into one stock, it would be Wells. The threshold has come into play instead as a consequence of Wells Fargo's buybacks, which concentrate ownership around remaining shareholders.
Over the last three fiscal years, the bank repurchased $23.5 billion worth of common stock, reducing its outstanding share count by a net 165 million shares, or approximately 3%. As Wells Fargo continues to do so, it'll push Berkshire's stake from where it is today -- at a little less than 10%, according to CNBC's Berkshire Hathaway Portfolio Tracker -- to above the threshold.
In addition to explaining why Buffett remained silent on Wells Fargo's controversy, this also explains why Berkshire Hathaway isn't represented on the bank's board of directors, despite being its biggest shareholder. If it were to have a seat on the board, then it obviously wouldn't be passive. As an aside, this also assuages any concern related to the fact that one of Buffett's lieutenants, Todd Combs, just joined the board of JPMorgan Chase -- a bank that Buffett himself owns shares of, but which Berkshire doesn't have a stake in.
The lesson in all of this for me, and hopefully for readers as well, is that it's important to be vigilant and humble when you're tempted to read too much into something that you don't have direct knowledge about.