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Bank of America and Wells Fargo compete like “cats and dogs” during business hours, Wells Fargo chief executive John Stumpf says, but that didn't keep him from spending Tuesday evening with Hugh McColl Jr., the retired CEO of his biggest rival.
The topic of conversation was the city that McColl played a major role in building over the last couple of decades. Now, from his base in San Francisco, Stumpf will have a big say in where the city goes from here after buying Charlotte-based Wachovia Corp. last year.
“We talked about what can we do and what he's doing to make this city an even better city than it is today,” Stumpf said in an interview Wednesday with the Observer. “We both recognize this is a very special place. I think the long-term prospects are very, very bright.”
Stumpf, 55, was in town this week to speak at the kick-off breakfast for a three-day Charlotte Chamber event, followed by visits with customers and employees. While noting the obvious challenges, he preached an upbeat message about the future of Charlotte and the U.S. economy.
Nearly six months into the merger, Wells has announced 548 layoffs in Charlotte, begun erasing the Wachovia name and put mostly its own leaders in charge. But Stumpf said his bank is taking its time in the integration and keeping the best people, regardless which company they came from. Over time, he says he would like to add jobs here, and perhaps even relocate business units to the city.
In a conversation on the 41st floor of Wachovia's former headquarters building, Stumpf talked about the merger, repaying government bailout funds, a subprime lawsuit the bank faces in Baltimore and the outlook for Wachovia shareholders. Questions and answers were edited for clarity and brevity.
Q. You mentioned in your remarks that you spend some of your time thinking about businesses you could relocate here. What can you say about that?
We have about 90 different businesses in Wells Fargo. Those businesses are not all headquartered in San Francisco. They tend to be headquartered where they started. So we have some new businesses to Wells Fargo that came as part of Wachovia that we had not been players in.
So there's a variety of things like that, and since there's great people here, there is great attitude (and) a lot of history, we will continue to look at the possibilities. I don't have anything I'm prepared to share today, but I'm hoping over time we can grow jobs here like we did in Minnesota.
Q. Wells has said so far that there will be 548 layoffs in uptown Charlotte. Can you say roughly what the total number will eventually be?
I don't know that. But I do know we are taking our time. We are doing that according to what is right for our people, what's right for our communities. We're not doing that based on a calender.
When we find a duplicative position, we're not saying automatically the person from Wachovia loses their job. We are looking at the best person, where the position ought to be, and we look at all of the ways to keep that person.
I think we have done a very good job doing that. Many of the reductions have come on the legacy Wells side, not just the legacy Wachovia side. I hope when this is all done it will be less than what the community expected.
Q. We've heard lately that you may be warming up to the investment banking business that you inherited from Wachovia. Can you give us more details?
We sure like the skill set of the bankers that have come with the Wachovia team. And there's lots of investment banking that we like a lot, where it starts with a customer, where we have a relationship, where we matter to that company, where we already have debt out to that company.
We like serving customers, and that's distinguished from doing some structured product that doesn't involve customers and some exotic proprietary investing where you invest for your own book. I'm not wild about that.
Q. Is there a certain size you'd like to be in the business? The top five?
There's what they call league tables. We're going to serve customers as often as we can and let the league tables take care of themselves.
Q. What are your plans for Wachovia's Customer Information Center, or CIC, in the University area? (This facility employs about 10,000 and is home to technology, call center, human resources and other operations.)
I've been to the CIC. Wonderful people there, wonderful facility. I've heard no plans, and I don't know of any other plans to do anything other than to continue to have the people that are there do the great work that they are doing. That's more specific than I get involved in, but I like what we're doing.
Q. When do you want to pay back the $25 billion you received from the Troubled Asset Relief Program?
As soon as it's practical.
Q. Is that this year, next year, do you have a timeline?
We have not yet applied to pay it back. We will be talking with the Fed. The first thing we did was get through the stress test. The stress test said that we had enough capital. The Fed said Wells should have more common capital, so a different composition of capital.
We typically have the highest capital ratios in the industry. The reason that we had less Tier 1 common capital is because we wrote off nearly $40 billion in loans when we bought Wachovia to put the losses behind us. We have great earnings power. We will earn that capital back very quickly.
So in the meantime, we are paying 5 percent after tax dividends. So this is a very good return for the taxpayer. But it was meant to be temporary. We want it to be temporary. We will pay it back as soon as practical. I don't know if there's any more I can say.
Q. In Baltimore, Wells Fargo faces a lawsuit that accuses its lenders of steering customers to subprime loans and targeting minority neighborhoods for these loans. When did you learn of these accusations, and what's your feeling on them?
I heard about the Baltimore suit shortly after it was filed. I totally disagree with the merits and the statements in their complaint. They say that our targeted lending caused their city to experience more foreclosures and it ruined their tax base and so forth.
Even in their complaint, they admitted that of the 33,000 foreclosures that they have had in the city of Baltimore since 2000, only 300 are related to us. Less than 1 percent. What they don't say is that they filed city tax liens on 19,000 of their homeowners. This is without merit in our judgment, and we will defend ourselves vigorously.
Since the complaint was filed, two of our former Wells Fargo teammates commented (in affidavits) about activities that they either participated in or observed as part of serving that community. I can say this: Wells Fargo has worked very hard to provide homeownership to not only African Americans but all Americans of any culture.
We make those loans in a fair and responsible way. We absolutely do not tolerate discrimination. We do not use race in our underwriting criteria. We are color blind with respect to that. And the (alleged racist comments made by Wells Fargo employees) are disgusting, not representative of the company that I know and love. It's foreign to our culture. We have a code of ethics that we all sign.
And since 2004, we have put a filter in place for when a customer comes to our company. No matter whether they come through the subprime channel or the prime channel, we give them the best deal so they can get the very best rate. We make our loans based on the risk characteristics and product choices of our customers. It has nothing to do with race or anything else.
Q. What are you seeing in the mortgage business in general?
It's really interesting how consumers have decided that a mortgage rate that starts with a 4 is a terrific rate. If it starts with a 5 it's a lousy rate. The fact of the matter is that a 30-year mortgage, with no points, fully amortizing that starts with 5 is a terrific rate.
But we tend to see mortgage originations slow at the 5.50 (percent interest rate) and really speed up at the 4.50. My suspicion is rates will go up and down. They'll bounce around.
Q. What do you say to the old Wachovia shareholders who only got a fraction of a Wells share for each Wachovia share in the merger?
What I'd say is you now have your stock with a very strong company, one of the strongest in the industry that has provided exceptional returns to shareholders for many, many years. While the entry point is probably not what shareholders would have hoped for, I think they're going to find it to be a very good long-term investment.
Q. How do you make decisions on what systems to keep?
It's actually a very involved process. This new company will serve one in three households in America. In the first quarter, we made one in four to one in five mortgages of all the mortgages made. We serve lots of customers.
Unlike some of our competitors, when we put this thing together it's going to be on one general ledger, one operating system, so it will be very convenient for our customers. You could move from New York City to North Carolina and never change your account. We're all on one system. We're spending a lot of time making sure we have the right infrastructure, the right technology, the right support.
Q. Are you picking Wells Fargo's retail banking systems versus Wachovia's?
That's still all in process. Whatever system we pick, it will be driven not by which legacy system it is but which one can help us help customers most effectively.
Q. Wells Fargo avoided some of the pitfalls of the mortgage crisis such as option adjustable rate mortgages, but you were involved in subprime loans. Was that a mistake, or is there a place for those loans?
We think there is a place for that. The subprime loans that we made – there's about $25 billion on our balance sheet – were made in a subsidiary company called Wells Fargo Financial. This is a very different kind of subprime loan. It's a debt consolidation product: The customer already owns her home, but she might have a lot of credit card debt, a debt on an auto, a debt with a hospital.
We would consolidate all that debt and put it on her house. That's the kind of subprime loans we put on the books. In fact, those loans are performing very, very well – well above the industry average because they are fully underwritten, there's no broker involved, full appraisals, full income verification.
Q. In addition to those loans, did the bank sell any of its subprime loans to investors?
In some cases, we originated some subprime that we did not keep on our balance sheet. If you look at the league tables, we are now the No. 1 mortgage originator company, but we have historically been No. 1 or 2. Our origination of subprime would be 8 or 9 or 10. We're well down the line and that relates more to the $25 billion we hold in this debt consolidation product. We are not big in that business and have never been big in that business.
Q. But there's still a place for it continuing on?
There is a place and, frankly, most of the subprime loans today are (government-insured Federal Housing Administration) loans. FHA has always been the government's program for subprime or new customers that are more challenging to get done. We are the No. 1 FHA lender so we are doing most of it through that space.
Q. What do you think of the new financial regulation that President Obama unveiled today?
I've not seen that yet. I would favor clarity.
Secondly, I am a believer that whoever participates in our industry ought to be regulated. If you look now at who got in trouble, it was many times companies that were unregulated or under-regulated. These companies went regulator shopping to try to find the weakest link so they could do whatever they wanted to do.
Our whole view of serving customers is to have them succeed financially and to the extent new legislation and new processes in Washington help that, I'm in favor of that.
Q. The market was pleased to see a strong first quarter from you. How is the second quarter shaping up?
We don't give guidance. Our first quarter was strong. We started to show the real power of this merger. The reason we did the Wachovia merger was not to get big. It was not to be a national player. It was not about ego. We thought this was a terrific company.
We thought together the two companies could grow faster (and) be more relevant for our customers than they could be alone. There's lots of things that Wachovia brings to the party. There's lots of things that Wells brings to the party. In the first quarter, you saw the real power of that combination.
Q. If you could go back in time and TARP would never be created, would you do that?
(laughs) That's a terrific question. I can't go back in time, so I just deal with the future.
Q. Have you talked to Warren Buffett (Wells' biggest investor) lately?
Yeah, I talked to him in the last couple of weeks. We still play cards together. He's terrific. He's doing well.
