Mr. Nassim Taleb argued that financial companies in general are prone to the black-swan negative events. If a project went really successful, the bankers wouldn't get additional compensation for their loan. But, if catastrophe happens, the bankers could lose a substantial amount of money. I think this makes a lot of logical sense, but then again not all financial businesses are created equal, perhaps WFC is one of those old, dirty, unpolished traders who have a long and successful trading career as Mr. Taleb witnessed in his life.
Perhaps WFC is the one that understand this risk phenomenon better than its rivals? History is hindsight 20/20, but WFC does seem to have the track record to back it up. Here Mr.Buffett mentioned:
Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"Another issue is the general sentiment that all financial companies are all screwed and not to be trusted. I don't know the probability and when the economy will recover, but WFC seems like one of the top candidates to earn sound return for its shareholders. The reason is its substantial earning power as Mr.Buffett noted:
You don't have to be a rocket scientist when your raw material cost is less than 1-1/2%. So I know that you can have a model that works fine and Wells has come closer to doing that right than any other big bank by some margin. They get their money cheaper than anybody else. We're the low-cost producer at Geico in auto insurance among big companies. And when you're the low-cost producer - whether it's copper, or in banking - it's huge.
Then on top of that, they're smart on the asset size. They stayed out of most of the big trouble areas. Now, even if you're getting 20% down payments on houses, if the other guy did enough dumb things, the house prices can fall to where you get hurt some. But they were not out there doing option ARMs and all these crazy things. They're going to have plenty of credit losses. But they will have, after a couple of quarters of getting Wachovia the way want it, $40 billion of pre-provision income.
And they do not have all kinds of time bombs around. Wells will lose some money. There's no question about that. And they'll lose more than the normal amount of money. Now, if they were getting their money at a percentage point higher, that would be $10 billion of difference there. But they've got the secret to both growth, low-cost deposits and a lot of ancillary income coming in from their customer base.
The recent changes of market to market accounting rules are worrisome. We can only hope the WFC management along with Mr. Buffett will keep acting as ethnically sound as they claim to be.
(Disclaimer: I have personal position in WFC)
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