BUFFETT: Wells Fargo made 3 huge mistakes during the fake accounts scandal but one 'dwarfs all the others'
Wells Fargo settled with regulators in September after it was revealed that employees had opened as many as 2 million accounts in the names of customers without their knowledge. This launched a massive investigation, two congressional hearings, and eventually led to former CEO John Stumpf stepping down.
During the Berkshire Hathaway annual meeting, Buffett addressed the scandal by breaking down three big problems.
"There were three very significant mistakes, but there was one that dwarfs all the others." said Buffett
The first mistake was creating an incentive structure that rewarded bad behavior.
Wells Fargo advocated cross-selling, in which employees were judged based on how many extra financial products they could sell to each customer.
"Clearly at Wells Fargo there was an incentive system built around cross selling and services per customer," Buffett said "Undoubtedly people got paid, graded, and rewarded based on that system... it turns out that was incentivizing the wrong behavior."
The second, and biggest mistake, according to Buffett was when executives found out about the scandal, former CEO John Stumpf did not do enough about the issue. According to an internal investigation, Stumpf knew about the systemic issue as far back as 2012, but did not take substantial action.
"The biggest mistake was, obviously I don't know all the facts, but at some point if there is a major problem will get to the CEO and at that point the CEO has to act," Buffett said.
"It had to stop when the CEO learns about it," Buffett continued.
Buffett compared it to the Salomon Brothers scandal which led to the near downfall of that investment institution.
The third mistake, Buffett said, was that the bank underestimated the fall out and public backlash. "They totally underestimated the impact of what they had done," Buffett said.
In the end, however, Buffett said the issue came down to not doing enough about the scandal when they found out about it.
"The main problem was they didn't act when they learned about it," the legendary investor concluded.
Wells Fargo is one of the largest holdings of Berkshire Hathaway. In fact, Berkshire applied to the Federal Reserve in order to own more than 10% of the bank, but eventually dropped the request after determining the additional regulation associated with owning more of the bank was too burdensome.