We're doing a theme week on Industry Focus over the next five days on times we were wrong in the past. To kick the week off, we look back on a show in November 2015, when we postulated that rumors about aggressive sales practices at Wells Fargo (NYSE:WFC) wouldn't change the investment thesis in the bank. Listen in to hear us talk about how and why we were so, so wrong.
A full transcript follows the video.
This video was recorded on Aug. 21, 2017.
Gaby Lapera: But I wanted everyone to know that it's a theme week here on Industry Focus. The official title of the theme week is "We Said What?" This week, all hosts will talk about mistakes that we've made, mostly on the show, but maybe also in real life, depending on the host. Let's go ahead and dive right in. Austin, I dug through the archives and found this gem from November of 2015. Can you hit that for us, please?
John Maxfield: This is where Wells Fargo has been caught up. But it's important still, particularly at this early stage in this whole process, that we keep in mind that these are stories that could be coming -- and I don't doubt that Wells Fargo has a very aggressive sales culture. They're known for cross-selling. You have to push your employees to sell if you want to cross-sell. That's just how it works. But whether or not it actually crossed the line, and whether this is going to change the investment theory on Wells Fargo, that's something I really doubt. I would be surprised if this thing costs tens of billions of dollars for Wells Fargo.
Lapera: Right, and that is one place that Wells Fargo is ahead of a lot of the other big banks. They didn't have any large settlements that they had to pay post-2008 financial crisis.
Maxfield: Yeah, and it made a huge difference. I think Bank of America's tally -- and this is from Bank of America itself -- was $195 billion from the crisis; $195 billion is what the crisis cost them. So the fact that Wells Fargo has largely avoided all that -- yeah, they could have a few hundred million here and there, and it shouldn't be doing things that, if they really are pressuring, I think we can all agree with that, they shouldn't be doing those things. But as an investment, this is still an incredibly solid bank.
Lapera: Yeah. I figure we should probably close with a quote from Wells Fargo, which is from Mary Eshet, their spokeswoman. "Wells Fargo's culture is focused on the best interest of its customers and creating a supportive, caring, and ethical environment for our team members," which, that's what she's paid to say, so keep that in mind.
Maxfield: Yeah, you don't think she wanted to come out and say, "We tell our employees to make sure that customers buy things whether they like it or not?" [laughs]
Lapera: Oh my god, why? [laughs] So, listeners, for a little bit of background on that, we were talking about a Wall Street Journal article that had come out on Nov. 30 of 2015, so that was quite a while ago now, about how Wells Fargo had been accused of aggressively pushing their salespeople to make these quotas, and we were like, "Oh, no, it's totally fine, guys!" Maxfield, do you want to chime in on how that turned out for us?
Maxfield: [laughs] First of all, when you guys came out with this theme week, and Gaby, when you mentioned this episode, I mean, I just thought it was the perfect episode for us to talk about, and a great episode to start out the theme week on, because it's such a clear case of being wrong --
Lapera: So wrong.
Maxfield: So wrong. And, it's really relevant right now. In September of last year, Wells Fargo was caught opening up something like 2 million fake accounts for customers in order to push their cross-sell ratio. To make things worse, after this came out, we learned that there were thousands of employees that were fired, and potentially many of them were fired because they tried to bring this scandal to light inside of Wells Fargo.
And then, after all of this -- you think that's all pretty bad, you're taking advantage of your customers, and you're then punishing your whistleblowers who are trying to do the right thing for your company -- but just recently it's come out that Wells Fargo also sold something like 500,000 of its customers, I've even read as many as 750,000 of its customers, this type of insurance that's called collateral protection insurance, which goes along with when you get an auto loan. If you have an auto loan with Wells Fargo and you don't have insurance on the car, Wells Fargo will charge you for this insurance to protect the collateral value of it. Well, 500,000 to 750,000 people had insurance but were nevertheless charged for it by Wells Fargo, which goes along with this whole cross-selling scandal. Then, on top of that, and I'm laughing not because I think it's funny but because it's so horrendous, something like 20,000 of those people had their loans go into default because of those additional payments, and their cars were repossessed. So yeah, I think it's pretty clear that we were wrong on all that.
Lapera: We were so wrong.