2019: Why has Buffett kept quite on fraud at Wells Fargo?

BECKY QUICK (CNBC): This is a question that comes from Mike Hebel. He says, “The Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail, and have often commented after the years-long fraudulent behavior of Wells Fargo employees, should have warranted jail sentences for several dozen, yet Wells just pays civil penalties and changes management.

“As proud shareholders of Berkshire, we cannot understand Mr. Buffett’s relative silence compared to his vigorous public pronouncement many years ago on Salomon’s misbehavior. Why so quiet?”

WARREN BUFFETT: Yeah, I would say this. The — (applause) — problem, well, as I see it — although, you know, I have read no reports internally or anything like that — but it looks like to me like Wells made some big mistakes in what they incentivized. And as Charlie says, there’s nothing like incentives, but they can incentivize the wrong behavior. And I’ve seen that a lot of places. And that clearly existed at Wells.

The interesting thing is, to the extent that they set up fake accounts, a couple million of them, that had no balance in them, that could not possibly have been profitable to Wells. So, you can incentivize some crazy things.

The problem is — I’m sure is that — and I don’t really have any inside information on it at all — but when you find a problem, you have to do something about it. And I think that’s where they probably made a mistake at Wells Fargo.

They made it at Salomon. I mean, John Gutfreund would never have played around with the government. He was the CEO of Salomon in 1991. He never would have done what the bond trader did that played around with the rules that the federal government had about government bond bidding.

But when he heard about it, he didn’t immediately notify the Federal Reserve. And he heard about it in late April, and May 15th, the government bond auction came along. And Paul Mozer did the same thing he’d done before, and gamed the auction.

And at this point, John Gutfreund — you know, the destiny of Salomon was straight downhill from that point forward. Because, essentially, he heard about a pyromaniac, and he let him keep the box of matches.

And at Wells, my understanding, there was an article in The Los Angeles Times maybe a couple years before the whole thing was exposed, and, you know, somebody ignored that article.

And Charlie has beaten me over the head all the years at Berkshire because we have 390,000 employees, and I will guarantee you that some of them are doing things that are wrong right now. There’s no way to have a city of 390,000 people and not need a policeman or a court system. And some people don’t follow the rules. And you can incentivize the wrong behavior. You’ve got to do something about it when it happens.

Wells has become, you know, exhibit one in recent years. But if you go back a few years, you know, you can almost go down — there’s quite a list of banks where people behaved badly. And where they — I would not say — I don’t know the specifics at Wells — but I’ve actually written in the annual report that they talk about moral hazard if they pay a lot of people.

The shareholders of Wells have paid a price. The shareholders of Citicorp paid a price. The shareholders of Goldman Sachs, the shareholders of Bank of America, they paid billions and billions of dollars, and they didn’t commit the acts. And of course, nobody did go — there were no jail sentences. And that is infuriating.

But the lesson that was taught was not that the government bailed you out because the government got its money back, but the shareholders of the various banks paid many, many billions of dollars.

And I don’t have any advice for anybody running a business except, when you find out something is leading to bad results or bad behavior, you know, you — if you’re in the top job, you’ve got to take action fast.

And that’s why we have hotlines. That’s why we get — when we get certain anonymous letters, we turn them over to the audit committee or to outside investigators.

And we will have — I will guarantee you that we will have some people who do things that are wrong at Berkshire in the next year or five years, ten years, and 50 years. It’s — you cannot have 390,000 people — and it’s the one thing that always worries me about my job, but — because I’ve got to hear about those things, and I’ve got to do something about them when I do hear about them. Charlie?

CHARLIE MUNGER: Well, I don’t think people ought to go to jail for honest errors of judgment. It’s bad enough to lose your job. And I don’t think that any of those top officers was deliberately malevolent in any way. I just — we’re talking about honest errors in judgment.

And I don’t think (former Wells Fargo CEO) Tim Sloan even committed honest errors of his judgment, I just think he was an accidental casualty that deserve the trouble. I wish Tim Sloan was still there.

WARREN BUFFETT: Yeah, there’s no evidence that he did a thing. But he stepped up to take a job that — where he was going to be a piñata, basically, for all kinds of investigations.

And rightfully, Wells should be checked out on everything they do. All banks should. I mean, they get a government guarantee and they receive trillions of dollars in deposits. And they do that basically because of the FDIC. And if they abuse that, they should pay a price.

If anybody does anything like a Paul Mozier did, for example, with Salomon, they ought to go to jail. Paul Mozier only went to jail for four months. But if you’re breaking laws, you should be prosecuted on it.

If you do a lot of dumb things, I wish they wouldn’t go away — the CEOs wouldn’t go away — so rich under those circumstances. But people will do dumb things. (Applause)

I actually proposed — think it may have been in one of the annual reports even. I proposed that, if a bank gets to where it needs government assistance, that basically the responsible CEO should lose his net worth and his spouse’s net worth. If he doesn’t want the job under those circumstances, you know (Applause)

And I think that the directors — I think they should come after the directors for the last five years — I think I proposed — of everything they’d received.

But it’s the shareholders who pay. I mean, if we own 9 percent of Wells, whatever this has cost, 9 percent of it is being borne by us. And it’s very hard to tie it directly.

One thing you should know, incidentally though, is that the FDIC, which was started — I think it was started January 1st, 1934 — but it was a New Deal proposal.

And the FDIC has not cost the United States government a penny. It now has about $100 billion in it. And that money has all been put in there by the banks. And that’s covered all the losses of the hundreds and hundreds and hundreds of financial institutions.

And I think the impression is that the government guarantee saved the banks, but the government money did not save the banks. The banks’ money, as an industry, not only has paid every loss, but they’ve accumulated an extra $100 billion, and that’s the reason the FDIC. assessments now are going back down. They had them at a high level. And they had a higher level for the very big banks.

When you hear all the talk about — the political talk — about the banks, they had not cost the federal government a penny. There were a lot of actions that took place that should not have taken place. And there’s a lot fewer now, I think, than there were in the period leading up to 2008 and ’09. But some banks will make big mistakes in the future. Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that.