How Wells Fargo’s Phony Accounts Scandal Makes J.P. Morgan Look Good
Wells Fargo CEO John Stumpf should have prepared for his Senate testimony by watching tapes of rival banking CEO Jamie Dimon. Clearly he didn’t. Perhaps because until Stumpf sat down in front of Congress a little over four years after Dimon did, we didn’t really consider how masterful a job the J.P. Morgan chief executive had done.
Dimon was summoned to Capitol Hill to testify for what was then the big, blowout Wall Street scandal—the bank’s $6 billion proprietary trading losses that were attributed to a single European employee dubbed the London Whale, but was really the product of misguided strategy by a division of the bank called the chief investment office.
The London Whale worked in a unit that only dealt with the bank’s own money, and didn’t involve the bank’s largest unit, nor its customers. Nonetheless, there are some similarities between the two scandals. Dimon, like Stumpf, didn’t seem to know what was going on in a division of his bank, in this case, the chief investment office. And like at Wells Fargo, the huge trading losses were a result of bad incentives. J.P. Morgan paid bonuses based on profits to traders in a unit that was supposed to be hedging the bank’s risk. Instead, it created a lot more—$6 billion in losses.
But unlike Stumpf, Dimon was ready when he faced Congress. Dimon said that he could not defend the system that created the trades. He said the mistake was “purely management mistakes,” not the fault of regulators. And, perhaps most importantly, he said that the board had already been looking into clawing back the pay for traders, and probably would. He said no bank should be too big to fail, and he agreed that his bank shouldn’t get a bailout if the time came. The shares of the bank rallied a bit after his testimony.
What’s hard to believe now, when watching Stumpf last week, is that Dimon’s performance got mixed reviews at the time. Stumpf just blinked blankly when he should have given answers. He let on that he didn’t know about the problems in the bank and the mass firing until it was written about in The Los Angeles Times. He tried to make it sound like letting the head of the banking unit retire with more then $124 million in stock and options was just like firing her. And, when asked about whether clawbacks made sense, he seemed to have no opinion.
Even after Dimon’s testimony, J.P. Morgan for much of the past four years had traded at a discount to Wells Fargo. The latter bank, which mostly stuck to consumer and commercial lending, was viewed as safer, in part because it was thought there wasn’t as much regulatory or legal risk as there was in investment banking. That thought was clearly wrong.
Even now, shares of Wells Fargo (WFC) trade at a premium to J.P. Morgan (JPM), about 1.3 times book value compared to just slightly over book value for J.P. Morgan. That’s in part because of the fact that Wells Fargo has produced superior returns, even so investors like Warren Buffett were willing to pay up for Wells Fargo’s seemingly lower-risk profile. But that last part clearly wasn’t the case.
Richard Bove, a long time bank analyst at Rafferty Capital, says Wells Fargo’s returns are sure to fall in the wake of the scandal. What’s the stock that he would recommend? J.P. Morgan.
Last week, J.P. Morgan announced that Todd Combs, a top portfolio manager at Buffett’s insurance conglomerate Berkshire Hathaway, was joining the board of J.P. Morgan. So Buffett’s allegiance may be shifting a bit as well.
Stumpf has a shot at redeeming himself on Thursday, when he testifies in the House. And he goes in better prepared after the board triggered a clawback that will force him to give up $41 million in stock options. Carrie Tolstedt, the former banking head, is giving up $19 million and retiring immediately.
Still, the idea that Wells Fargo was America’s safest big bank, and the armor that it gave the company’s share in the market, is likely, at least for now, pretty significantly pierced.