Why on earth did Warren Buffett replace Wells Fargo for Citigroup?

Warren Buffett’s personal affiliation with the companies in his portfolio is often mixed with difficult business decisions made by him or his managers. Berkshire Hathaway Chair Cherry seems to be enjoying the taste of Coke in a real sense; He praised Coca-Cola’s return.

It was Wells Fargo where the head and heart were most aligned. When he bought the first 10 percent stake 33 years ago, Buffett praised the “excellently managed, high-return banking operation,” but the bank also reflected Buffett’s own homespan attraction.

Although it later became the world’s largest bank by market capitalization, Wales avoided large-scale expansion outside the United States. Stuck with consumer and commercial debt, Wales refuses to develop or acquire a large investment bank.

There were other less obvious connections. Longtime Wales CEO John Stump used to play bridge with Buffett’s younger sister Bertie.

In 2009, Buffett said of the bank: “If I kept all my net worth in one stock, that would be the stock.”

But now he does not own any of it.

Berkshire began reducing its stake in Wales in 2017 and revealed in a filing this week that it had dropped the entire position and made a new investment in Citigroup.

The enduring story is that Wales has lost its moral compass, betraying the trust that Berkshire has had in the bank for so long. But has it really changed that in Berkshire?

JPMorgan praised Buffett Wells for acting more like Walmart than Chase. “Wales has a completely different attitude,” he once told Fortune. “For this [then chair Dick] Kovasevich calls them ‘retail stores’. He doesn’t even like the word ‘banking’.

Wells was famous for “cross-selling” – came to open a current account but also left with a credit card or car insurance. Yet one of the reasons Wales is so much better than the competition is that it has opened millions of accounts without the consent of its customers.

The 2016 scandal has resulted in billions of dollars in fines, a one-size-fits-all cap from regulators, and has ultimately led to the departure of two chiefs in a row.

Now friendship has been replaced by antipathy. In 2020, Buffett’s partner Charlie Munger, Berkshire’s vice-chair, described Wales’ incoming chief Charlie Scarf’s decision to continue living in New York instead of moving to the bank’s headquarters in San Francisco as “outrageous”.

(Munger has a strict view of human habitation. He donated $ 200 million to a new student dormitory in Santa Barbara on the condition that most homes have no windows.)

Six years after the fake-account scandal broke, it is still unclear why Wales is still in the sin bin. Some customers suffer but the scam was basically a ploy to meet internal sales targets. Other banks have committed worse crimes but are not found to be limited in their size by regulators.

Even more confusing because Berkshire has now jetted Wales. Buffett acquired 10 percent of his shares in 1989 and 1990 for 290 million. It was worth about $ 20 billion when Berkshire sold most of it. With dividends, returns have comfortably surpassed the S&P 500.

The stock has failed to recover to pre-scandal levels, but the bank is set to make strong profits with a credible return of 12 per cent on equity. When regulators finally relax their grip, Wells will have the opportunity to flex his muscles and provide attractive gains as well as growth.

Citi, on the other hand, is not a typical buffet-shaped bank. He has shown a tendency towards large US-centric institutions such as Bank of America and US Bancorp. Citi is a highly international, accident-prone business that relies on a mercury loan business operation. It employs thousands of investment bankers or “money shufflers” because Buffett labels them as hateful.

The sudden change for Berkshire is not unknown. Buffett avoided most tech stocks until 2016 when Berkshire began buying Apple; It is now the dominant stock in the portfolio.

But is Wales Fargo switching for City? It’s a lot like Jack Daniels swapping his cherry coke.

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