Warren Buffett Weathered The Salomon Brothers Scandal; What's That Mean For Wells Fargo's Woes?

Could billionaire investor Warren Buffett, who has a chunk of shares of the bank, be that knight?

The Great Fraud

Wells Fargo found itself in the center of a storm earlier this month, as it was pulled up by regulatory agencies for allegedly opening fake savings and credit accounts without customers' volition. The misconduct was done apparently to meet employee sales goals program the company ran, which was necessary for determining employees' financial rewards.

Ripple Effects

The beleaguered bank was fined $185 million, as the fake account openings' tally between May 2011 and July 2015 ran to 2 million. Since then, the company has taken several actions, including termination of 5,300 employees and deciding to scrap the controversial employee sales goals program.

However, emerging reports suggest the company penalized the whistle blowers. Wells Fargo CEO John Stumpf had to testify before the Senate Banking Committee, with senators even calling for his resignation.

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Anyone Remember Salomon?

The Wells Fargo development gives one a sense of déjà vu. In 1987, bond trading firm Salomon Brothers disclosed a $70 write down of debt acquired by trading junk bonds. The series of events that succeeded led to the market crash of 1987. Traders in Salomon were placing false Treasury bond bids to flout trading rules.

Buffett To The Rescue

In fact, shortly before, Buffett had invested $700 million in Salomon. The Salomon scandal wiped off one-third of Buffett's investment.

For sanity to return amid the chaos, Buffett chose to take the reins of the company for a period of nine months, when he went about ruthlessly firing personnel involved in the dupe. By then, normalcy was restored and the turned-around firm was sold off to Travelers Companies Inc TRV. Buffett pocketed a neat profit, as his investment had more than doubled.

Silence This Time Around

Buffett is once again finding himself in a similar situation. He, being the largest shareholder of Wells Fargo, would naturally be bothered. He is said to own 500 million shares or roughly a 10 percent stake in the bank. For now, the octogenarian is tight-lipped, giving the U.S. presidential election as the reason behind his silence. One may have to wait up to November to see any proactive action from Buffett.

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If Buffett chooses to liquidate his holdings to steer clear of any controversy, he may have to devise some novel way of escaping capital gains tax. The cost of Buffett's investment made at varied periods was about $12.7 billion, while his 500 million shares could currently be worth about $23 billion. It would be no surprise if the ingenious Buffett structure the transaction as swaps so that it doesn't trigger capital gain tax.

At time of writing, Wells Fargo shares were down 2.21 percent at $45.53.