It was about a year after Wells Fargo and Kovacevich, the bank’s chairman at the time, had announced a plan to purchase Wachovia, and he was reaching out to Warren Buffett for help. Just days before, Buffett had heralded his own acquisition of railroad Burlington Northern Santa Fe Corp. for $26 billion.
The billionaire chairman and chief executive officer of Berkshire Hathaway had lined up JPMorgan Chase for financing, Kovacevich recalls. Berkshire also is Wells Fargo’s largest shareholder. The two men spoke for no more than 10 minutes, Kovacevich says, and the banker’s message was simple.
‘This is important’
“Here we are, our largest shareholder, and we had never done any meaningful investment banking for him,” said Kovacevich, who stepped down as chairman in 2009 but continues to consult with management and represent the company to customers. “I called him and said we’ve got some great bankers here now, this is important, and we’d really like to show you what we can do.”The phone call marked a turning point for Wells Fargo, founded in 1852 to serve Gold Rush pioneers. Far from Wall Street, the bank had long rejected the more volatile and transaction-oriented culture of investment banking. In 2005, Kovacevich, then also CEO, said having superstar bankers focused on one-time deals was “incompatible” with his company.
Now, Wells Fargo is pushing into the business it once shunned, even as rivals facing fickle markets, meager revenue and new restrictions scale back. Financial firms worldwide announced plans last year to cut more than 230,000 jobs as global stock offerings plunged 29 percent and U.S. bond issuance fell 6.8 percent.
The move may help Wells Fargo, led since 2007 by CEO John Stumpf, weather head winds facing commercial banks. Firms are struggling to find growth as rules limit overdraft and debit card fees and lending remains sluggish.
“The government has really limited their ability to grow their operations, so I can understand why they are trying to move out of traditional banking, but it’s a tough thing to do,” said William Frels, CEO of money manager Mairs & Power, which held more than 3.6 million Wells Fargo shares at the end of September. “It’s not a positive. My take is that they are desperate to find new avenues of growth.”
Record profit
Still, the bank has been profitable for 12 consecutive quarters, through the three-month period that ended on Dec. 31, setting records in the past six. It reported net income of $15.9 billion in 2011.After Kovacevich’s call, Buffett added Wells Fargo to the Burlington deal. The bank has gone on to manage Burlington bond issues and in January 2011 helped underwrite Berkshire’s $1.5 billion debt offering. Buffett declined, through a spokeswoman, to comment.
“Before the crisis, we would have had to compromise both our culture and ethics in order to compete,” said Kovacevich, who, during an almost 35-year banking career that began at Citicorp, pursued his own agenda in defiance of industry trends.
The collapse of Lehman Bros. Holdings and the sales of Bear Stearns and Merrill Lynch in 2008 led Kovacevich and Stumpf to rethink their stance.
Buffett’s imprimatur notwithstanding, Wells Fargo has a big hill to climb. The bank ranked 12th among U.S. debt underwriters in 2011, with 1,824 deals valued at $53.1 billion, behind London’s HSBC Holdings and France’s BNP Paribas SA. In U.S. mergers and acquisitions, Wells Fargo ranked 21st, advising on 31 deals last year valued at $27.6 billion.
Wells Fargo also will have to convince naysayers it won’t go the way of other commercial banks that have sought to enter the investment-banking business only to retreat, says Brian Foran, a New York analyst at Nomura Holdings Inc. Bank of America tried expanding into investment banking with limited success until it purchased Merrill Lynch, he said.
“Investors are nervous,” Foran said. “They feel like they’ve seen this movie before.”
This article appeared on page D – 4 of the San Francisco Chronicle
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