Warren Buffett on Wells Fargo

Fortune: How is Wells Fargo unique?

Warren Buffett: It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. 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?"

What about all the smart analysts who think no big bank can survive in its present form, including Wells Fargo?

Almost 20 years ago they were saying the same thing. In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. 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.

Insurance revenues for example, which had double-digit revenue growth in 2008.

And I would say that most of the critics of Wells don't even know they've got that business. That business alone is worth many billions of dollars. And their mortgage business, as you can imagine in this period, I mean, the volume that is poring through there, is huge. The critics have been right on other big banks, so I think they're inclined to sweep Wells in as well to some extent. And if you've been right on Citi and you've been right on BofA, it gets easy to say, well, they're all going to go.

We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don't know about because South Florida is going to be the last to come back, and they've got a concentration down there. The other three, they're going to have a lousy year, but they'll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It's a helluva good business.

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John Stumpf: Wells Fargo cracks the whip

As one of the country’s top two mortgage originators and distributors, Wells knew that steering clear of subprime and securitised lending would mean ceding valuable business to more aggressive competitors.

“You can imagine the pressure on us. We were the number one mortgage originator and we had to give up market share and earnings,” Mr Stumpf says. “[But] it is more difficult to attend a party and leave before the trouble starts than not to attend the party at all. Part of my job here is to make sure we don’t attend parties that make no sense.”

With his laid-back delivery and penchant for catchy metaphors – traits he shares with Warren Buffett, his occasional bridge opponent and Wells’ largest shareholder – the 54-year-old Mr Stumpf makes Wells’ escape from the crisis sound easy. The reality is that the lender’s bold counter-cyclical call saved the company from the worst US housing bust since the Great Depression.

To be sure, Wells did suffer some $3bn in credit losses and has a sizeable portfolio of home equity loans that could continue to lose money for some time. But while some rivals such as Citigroup and Wachovia were forced to raise billions of dollars to close the gaping holes in their balance sheet and others such as Countrywide Financial had to sell themselves to avoid extinction, Wells’ relative financial health turned it into the hottest property in US banking.

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