John Stumpf may not have realized that he was taking on one of the toughest jobs in corporate America when he agreed to become Wells Fargo's new chief executive officer in June 2007.
Almost immediately, Stumpf faced a nationwide housing crisis, skyrocketing fuel prices, mounting loan losses, and a world economy going into a state of cardiac arrest.
Then, in a corporate coup that jolted the financial world, San Francisco-based Wells Fargo snatched Wachovia Corp. of Charlotte, N.C. out from under its bigger rival -- Citigroup -- creating the nation's fourth largest bank by assets. The giant acquisition has put new stress on Wells Fargo's balance sheet, at a time when Stumpf must navigate the bank through a deepening recession and heightened oversight from regulators.
On a trip to Minneapolis this week, Stumpf, a 27-year veteran of Wells Fargo and a native of Pierz, Minn, sat down with reporter Chris Serres to share his views on challenges facing Wells Fargo and the banking industry.
Q The Federal Reserve just said they expect the recession will last longer than expected and the jobless rate may be as high as 8.5 percent through late 2010. When do you think we'll emerge from this recession?
A I have been careful not to make predictions about what inning we're in, about whether it's a double header, whether we're in extra innings, and when we might come out, because I don't know. I've said publicly that we will get through this and we're one day closer to the recovery today than we were yesterday. I know that's not particularly prophetic. But I am seeing some signs ... that the rate of decline is ebbing in house values, in business failures ... First of all, we've got to find the bottom in housing. That's critically important.
Q So what signs of improvement are you seeing, particularly with housing?
A The inventories. Take California, which is a big part of our market. We had 12-month inventories of used homes a year ago. Today, we have 5 months. Today, when we sell a property on behalf of one of our investors, we get multiple bids. Now, one sparrow a summer does not make, but that's improvement. Record low interest rates is a huge economic driver and stimulus. There's about $11 trillion in mortgages on U.S. homes. The average note rate is something around 6 percent. If you could qualify those customers into a new rate ... you'd put an average of $325 a month in the consumer's pocket. So that's a big stimulus. Also, gas prices have come down. That's a stimulus. There's a stimulus package that Congress passed and Obama signed. Those were all positives for the economy.
Q Why do you see it as so important for the housing market to recover for the economy to improve?
A Even though housing only makes up, it depends who you talk to, 8 or 9 percent of GDP, it makes up a huge part of the consumer psyche. It's the whole wealth effect. When your home is losing value, whether you have a job or not, you feel poorer. When your home is gaining value or holding its own, it has a very different impact on people's psyche and their willingness to spend.
Q Housing is even more important, is it not, for Mainstreet America than the stock market?
A Absolutely. There's a study being done, and I'll have these numbers wrong, but it's directionally right, that says when your stock portfolio goes up by $50,000, you spend very little of it. You spend $5,000. But when your house value goes up $50,000, you spend half of it, because that's viewed as more important and more real. You look at the value of housing, and I mean, there's $11 trillion worth of debt on American houses ... and the stock market is not that big, it's not even close. It's a much bigger financial asset than stocks.
Q So is it your view that we won't come out of the recession until we reach a bottom in housing?
A I don't think it's that simple. I do think we need to find a bottom. But I also believe you can't restructure enough loans to fix this economy on the housing side. This is still about jobs. It's all about jobs. I think you need to find the bottom in housing, but you also need to find the bottom on job loss, and I think those two are actually related to one another.
Q Why is it that people aren't spending money?
A I think they're concerned about their jobs. So there is actually a "confidence crisis." Once people feel secure about their jobs, once they've had a chance to refinance a mortgage, to put more money in their pockets, I think you'll start to see some spending again. You've gotta reach the bottom of housing, get a sense that you're job is secure, and then we'll start to see ourselves pull out of this. A week ago, there was a prediction that we'll see positive GDP growth in the fourth quarter. You know, I don't know. But I would expect this: We'll see unemployment get worse before it gets better. There's a fair amount of agreement on that. But it tends to be a lagging indicator. What will be interesting will be to see what is the makeup of GDP. We had a 6 percent reduction last quarter, but a chunk of that was with taking down inventories. You can't do that forever. Some of this will start to turn.
Q Wells Fargo has been making more loans, but is that a smart thing to do at this point when consumers are already overwhelmed with debt? Are you repeating the sins of the past?
A Let's talk about the sins of the past for a second. Our vision and values start with two very simple sentences: We want to satisfy all of our customers' financial needs and help them succeed financially. We never said we'd be Number 1 in mortgages. We never said we had to make a lot of loans. We never said any of those things. We satisfy and try to solve for our customers issues and help them succeed. ... And we don't ever push to do something that doesn't make sense. I'll give you an example. In the early part of this decade, in 2002, 2003 and 2004, layering risk, doing `no-doc' mortgages, no down-payment mortgages to subprime borrowers, we didn't do it. Option ARMs, these negative amortization loans, we didn't do those. We gave up market share. We gave up billions of dollars in originations because it didn't make sense to us. So we didn't participate in that, and now when those companies that did that are either gone or in trouble, we're now able to go out and do business the way we've always done it, with our vision and values, and we're winning new customers because of that. In fact, we shrunk the balance sheet two or three years ago. We couldn't get the returns.
Q But how do we know that these new loans you're putting on the books now are any better than the loans you made four years ago that ended up going sour?
A Most of the loans that we put on the books four years ago we should have put on the books four years ago. Our losses are higher today because our customers are feeling the pain of unemployment and other things, but for the most part we kept our credit discipline. We are not doing some of the same things that we did three or four years ago, but also many loans we're making today are mortgage loans that are Fannie and Freddie guaranteed and we originate those and actually sell them. Our loan totals actually went down in the first quarter from the end of the year, because we're actually through the acquisition of Wachovia, shrinking certain portfolios with more risk than we want, and we're moving those off the balance sheet.
Q You mentioned earlier that you didn't do a lot of the crazy things that other banks did. But recently a nonprofit group rated Wells Fargo as one of the largest subprime housing lenders in the country.
A We did some subprime, but we didn't do a lot of it. ... For example, the subprime that we did for our own portfolio was a debt consolidation real estate product out of Wells Fargo Financial. So you already own the home, you have three or four debts you consolidate into one debt, then we made a loan on the home for that consumer. It reduced the payment, it consolidated their bills. It made it more affordable. In fact, that portfolio is one of our best-performing portfolios. We were about $25 billion outstanding in that product.
Q Are you still offering that product?
A It's limited. It's a harder product to sell because people don't have the equity in their homes anymore to consolidate their debts. So we're not doing much of that anymore.
Q So you got into the upper ranking of subprime lenders just based on that one product?
A That's correct.
Q Back in March, [Wells Fargo chairman and former CEO] Dick Kovacevich referred to the government "stress tests" of the 19 largest banks as "asinine." Did you agree with that assessment then? And do you agree with it now?
A Well, I'll answer your question this way: This was an unusual process and an unusual time, and it was difficult for both our regulators and for the banks that went through this, and I don't think I'd want to do it again, and I'm glad it's over with, and I'm happy at the end of the day that the Fed found that we had adequate capital. They wanted a different composition of capital. We think they missed on some of their analysis. They were also spot-on in some of their analysis, in our judgment, which we took a lot of comfort in. So we're going down the road of serving customers and that's behind us.
Q Do you think the "asinine" comment may have angered the regulators, or made them more critical of Wells Fargo than your competitors during the stress tests?
A Oh, I don't know. I've known these regulators for a long time. So has Dick. There's plenty of thick skin to go around. No, they treated us fairly through this whole process. I don't think any one comment at any one time would in any way derail a long-term relationship that we've had.
Q But you disagreed with their conclusion that you need to raise $13.7 billion in new capital. What was the fundamental disagreement here between you and the regulators?
A The big issue was something called "PPNR," pre-provision net revenue. Think of it as your profits before you pay for your credit losses. We think they underestimated that. We think they're off.
Q In terms of percentages, how off were they?
A They were off by 20 to 25 percent. A big number.
Q Why?
A Because most companies don't grow revenues the way we do in tough times. Last year, we grew revenues by 6 percent. In the first quarter, we grew legacy Wells Fargo [revenue] by 16 percent. We have some businesses that are countercyclical. When times get more difficult, now with mortgage rates at historic lows, it's booming.
Q I'm assuming you told the regulators this.
A Absolutely.
Q So why did they not see this your way?
A Well, the regulators were doing 19 banks. You've got economic models, econometric models that you look at and other things, and we're a very different company. ... And most of our revenue to begin with is real revenue. We never got into the business of building SIVs and manufacturing off-balance sheet things and one-time things.
Q So, in your mind, are they underestimating your revenue because they're lumping you in with the other banks?
A Exactly, with the other players. So then we were asked to build or come up with $13.7 billion as buffer in common capital. We have more than enough total capital. It's just the composition.
Q How much of that capital have you already raised?
A We went to the marketplace and we raised $8.6 billion, like boom. That's two-thirds of the $13.7 billion.
Q As far as the stress tests are concerned, did you disagree with the whole idea of the regulators creating this dark economic scenario, in which something like one out of five credit-card loans would go bad, one out of 10 home loans go bad, and so on. Did that make sense?
A Actually, we agreed with that. In fact, one of the big questions that's out there has been, `Wells Fargo, what did you bite off when you bought Wachovia?' We know you have a terrific franchise. We know you have terrific distribution. Combined, it will be the best in the country. But how bad is the portfolio? We've been through that portfolio five different times since we made the announcement [to acquire Wachovia] on October 3rd, and every time we come up with the same zip code that we had on our losses, the same number of overall losses.
Q So you've gone through this Wachovia portfolio five different times? I assume with a fine-tooth comb?
A That's correct. I mean, cracking files. We'll look file by file. And [the regulators] went through it then, and they came up with the same number we came up with.
Q I'm assuming you told the regulators, `Look, you're underestimating our revenue power.' What did they say in response?
A They said we see it a different way. And we even had the benefit of knowing what it feels like to be in a stress market. We're in markets like Nebraska and Iowa that have 4.5 percent unemployment, but we know what it's like to be in California, where they're at 10 percent unemployment and they're already at their stress levels. Again, I'm not being critical of them, because it's very difficult to be in their situation. But how can they know more about our portfolio than we do? How can they know more about the business? Dick and I grew up in this, and we have people who go through this, our board goes through this, and we know our numbers, especially on the revenue side. But it is what it is.
Q But one could look at this from the outside and say, `Look, the big banks have been gotten things terribly wrong with their projections in recent years, so why should we trust you over the regulators?' I mean, who would have thought five years ago that Washington Mutual, the nation's biggest thrift, would be taken over by the feds.
A The only answer we can give is, we're not WaMu [Washington Mutual]. We're not these companies. We didn't do this stuff. Last year, in the most difficult year we've had in our industry, we grew revenue 6 percent, and we shrunk expenses by 1 percent. We made an almost $3 billion profit after tax, after paying for all the Wachovia things, and we came in the first quarter and had record earnings and record revenue, and we have a mortgage pipeline that's the biggest we've had since 2003, and on and on and on. The record speaks for itself.
Q Let's talk about the credit-card legislation. Just yesterday, the Senate voted in favor of sweeping credit-card legislation that gives consumers some relief from higher interest rates and fees. The industry has attacked this. Do you think the proposals are unreasonable?
A I think this legislation is the result of some very bad practices that the industry embraced. Not Wells Fargo, but the industry. I'll give you some examples. There was something called "universal default," which we never did. It's where, if you're current with a credit card for a company, and you have a past-due loan someplace else, they would raise your credit card and consider you in default because you were in default someplace else. There was something called "double cycle billing," where even if you paid your credit off at the end of the month, they would use a two-cycle look at that, and say, well, it was really on the books, and they would charge you interest on that. And there were some other egregious type of activities around fees and so forth. In Wells Fargo's case, we didn't do those things.
Q Are you concerned that these changes as proposed would make it difficult to extend more credit?
A If the bill comes out so punitive, you might see some credit-card companies pull their horns in and make credit less available at a time when credit needs to become more available to get the economy doing.
Q But it sounds as if you agree that some reform is necessary?
A Yes. I believe this: If everyone behaved the way we [Wells Fargo] did with credit cards, there wouldn't be this legislation. There wouldn't be the need for it.
Q Has there been a bad idea that's been proposed thus far in the credit-card legislation?
A If we can't price for risk on an individual basis, that would be bad. If we can't set rates. Because in all of our credit products, we try to set price based on risk levels. If we're not able to do that, where you can price for the risk and get a proper return, I don't think that helps. ... Certain fees make sense. Again, I don't know what they have in there, but you have to be able to have this balance between risk and return. And if that gets separated, good things are not going to happen.
Q I have to ask about your March meeting with President Obama. You were with your friend [U.S. Bancorp CEO] Richard Davis and some other bank executives. Tell me about that meeting and your impression of Obama.
A He was very much a gentleman and he was very engaged in our meeting. He clearly wants us to help the economy going again. He told us he's there to help us. He also said, "I'm the only thing between you and the pitchforks."
Q What did Obama mean by that "pitchforks" comment?
A I don't know exactly. I didn't have the guts to ask him. I think there was a lot of concern about lending money to the economy, doing mortgage refinancings, and so forth, but he was very engaged. I talked to him about the mortgage opportunity. Because we're the largest mortgage originator in the country, I said, `Okay, we've got these rates now that are at 50-year lows, this is a huge stimulus for the economy, help us get more people refinanced, raise conforming limits, help those who happen to be underwater on loan-to-value, put that aside even if they're current, so they can enjoy these rates also."
Q And how did Obama respond?
A Within the next couple of days, we got calls from his people - [White House chief of staff] Rahm Emanuel, [chief economic adviser] Larry Summers -- and when he got back from Europe a week or so later, he had a number of mortgage customers come to the White House, so he could showcase this whole thing. He actually did that.
Q Did you come away from the meeting with a sense that he had a real grasp of what was going on with the economy and banking?
A Yes, I think he's clearly a bright guy. He clearly has a real sense of what the country is going through. He is hugely popular. And I'm not suggesting that I agree with him on everything. But I respect him for what he's trying to do. He's got a lot on his hands. And I think the question is: How much can he tackle and how fast?
Q Did he do any scolding while you were there. You know, wagging the finger and saying, 'You're not doing enough lending?'
A I don't know that I would describe it as scolding, but he is surely interested in the industry taking leadership in getting the economy going again. That was a clear message. And we are consistent with him on that.
Q Let's talk about the Wachovia deal. Why should someone in Minnesota -- say, sitting in your hometown of Pierz, Minnesota -- get excited about Wells Fargo buying Wachovia -- particularly when all they've heard about the deal is the $40 billion in bad loans you've had to write down? What's in it for them?
A In Minnesota, the value would be, if you ever travel to the southeastern part of the country, you'll have ATM machines, you'll have stores, you'll have distribution. If you retire there, we're the largest bank in Florida. A lot of people from here go to Florida and retire, move their residence. You don't need to move your accounts. ... But going back to products, for example, we have 38 percent of our customers carry our credit card. In their case, it's just 11 percent. ... We think we can grow together faster than we could grow alone. And at the end of the day, that's the reason we did the deal. It was not about being big. It was not about size. It was simply that we had the opportunity to do something that would define our company for generations to come.
Q There has been a lot of talk of late that banks in this country have simply become too big. What do you say to criticism that the Wachovia deal will turn Wells Fargo into the very kind of institution that has created so many problems? That you're just becoming another Bank of America or another Citigroup?
A First of all, big is not necessarily analogous to bad, and small is not necessarily analogous to good. There have been 47 small banks that have failed this year, or even more than that. So I think it's about the quality of leadership, the culture of the company, the operating discipline that it has, and the complexity.
Q So, in your mind, size is not a problem.
A The only problem with size is that if you have poor management, a bad operating culture, you're highly complex and you have trouble, you have a bigger problem on your hands than if you're smaller. But we have deep management, we've been around for a long time, and we were all puppies when we came here, and we know each other. I've been at this company 27 years going on 28, and most of the people who report to me - the average tenure is probably 20 years. That's true in the depth of the organization, across the board.
Q I see your point about the importance of strong management. Yet the CEOs of Bank of America and Citigroup and even Bear Stearns were extolled as excellent at one point, but not anymore. ... So there might be a perception among the public that banks can become so big that even executives of the highest caliber might not be capable of managing them?
A In most cases, if you look around, what causes difficulty is when you do acquisitions, a series of acquisitions that are outside the company's skill set or outside of its normal activities, experiences, or the complexity of being in many countries. If you look at Wells Fargo, yes, we just got twice as big, but by doing virtually the same stuff we've always been doing. Whether we do it in Florida now, in addition to what we're doing in Texas, we know how the model works. When you look at size, we're large, but we're half the size of Bank of America.
Q So you're saying that, even with the Wachovia deal, you're not venturing beyond what you know.
A Exactly. I mean, Warren Buffett is our largest shareholder. And when I go to see him, he's got three in-boxes: "Yes," "no," and "too difficult," and "too difficult is usually the biggest pile." I take a lesson from that.
Q When was the last time you met with Buffett?
A Oh, I talk to him fairly regularly. Let's see, I played bridge with him maybe a month ago. I play bridge with him, not often enough, but I enjoy playing with him.
Q He's been increasing his stake in Wells Fargo of late.
A Yes. He's a terrific owner. He's got a saying, `You get the owners you deserve.' And boy he's right about that. If you're a long-term company that takes a long-term view of business, you're going to get long-term investors. If you're worried about the next 90 days, you're going to get a 90-day investor. And Warren is a terrific owner.
Q Eighteen of 84 of your business lines are here in Minneapolis. Are there any business lines or divisions here that you anticipate you'll have to close or reduce in size as you merge operations with Wachovia?
A It's early to tell, but I don't see that. Just because businesses are headquartered here. For example, our debit business is headquartered here. Our institutional investing business is headquartered here. Some of our asset based lending is headquartered here. Our leasing company is headquartered here. While the product might be manufactured here, it's sold someplace else. And some of these businesses, Wachovia was not in.
Q I would have thought that Wachovia would have similar business lines at its old headquarters in Charlotte, N.C. , and that you could then shift some work there.
A No, not in all cases. For example, they weren't in the stock transfer business. That's headquartered here. Some of our commercial mortgage activity they were not in. There were some businesses that they have there, and we will use Charlotte as our eastern headquarters, but I can't imagine there would be an impact in Minnesota.
Q So you don't anticipate moving any division or business lines outside of Minnesota?
A Again, I want to be careful because we're early in the process, but I don't, it would surprise me if there would be any perceivable or meaningful impact on jobs in Minnesota because of our Wachovia merger.
Q When do you expect to pay back the $25 billion in taxpayer capital you received under the government bailout program?
A We want to do it as soon as possible. It's not a one-party agreement. The Fed has to approve, the Treasury, so it's not easy. But the sooner that will happen, I think it will be good for everyone involved. ... And when it's done, I'm going to thank them for their confidence in us, and move on down the road.
Q One other question. Your predecessor, Dick Kovacevich, is still out there a lot, on television and making public comments, and it has left some observers asking, `Okay, is Dick running this bank, or is John Stumpf.'
A No, I'm running the bank. Dick is chairman. He's been enormously helpful to me. We've worked together for 27 years. He's coming to my daughter's wedding. We're friends. But there's a lot of work to be done right now, and frankly he's been very helpful. But I'm the CEO. All of the management reports to me. Dick doesn't have any direct reports. He was gracious enough to hang around for an extra period of time to help through this difficult period. And he's the best our industry has produced in a generation. We should be so lucky to have his counsel in this period of time.
Q Do you think it's okay for him to be out there, saying things about the bank publicly, when you're the CEO? Have you tried to scale him back a little bit?
A No. He's not been out there that much. He's just fine.
Q Do you ever call him up and say, `Hey, Dick, let me handle this one, let me go on CNBC this time.'
A No one fights to get on CNBC. He can have all the daytime shows he wants.
Chris Serres
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