DS News - Bank of America

38 BUFFETT SAYS WELLS FARGO INCENTIVES, CEO TO BLAME According to billionaire Warren Buffett, Wells Fargo was "incentivizing the wrong kind of behavior" during the recent scandal that saw its sales personnel create fake accounts in order to meet quotas. e Chairman of Berkshire Hathaway, which owns just fewer than 500 million shares of Wells Fargo stock, addressed the bank's ordeal in a question-and-answer session with shareholders at the company's annual meeting in May. "Clearly at Wells Fargo, there was an incentive system built around cross-selling a number of services per customer," Buffett said. "Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes." Buffett also criticized Wells Fargo's then- CEO John Stumpf for not acting quickly enough. "It had to stop when the CEO learned about it," he said. "ey totally underestimated the impact." Still, every business has its problems, and Buffett said that's to be expected. "We did not buy American Express or Wells Fargo or United Airlines or Coca-Cola with the idea that they would never have problems or they would never have competition," Buffett said. "But we did buy them because we thought they had very, very strong hands." Berkshire Hathaway sold its 7.13 million shares of Wells Fargo stock in early April, earning about $384 million on the sale. e firm still holds 497 million shares—worth about $25 billion—across the company and its many subsidiaries, though a recent news release indicates plans to sell another nearly 2 million shares in the near future. According to the same release, the sales are not due to "investment or valuation considerations" but are instead a result of Berkshire's desire to own a less-than-10 percent stake in the company so as not to be beholden to requirements of the Change in Bank Control Act. In the Q&A session, Buffett and Berkshire's Vice Chairman Charlie Munger also covered the firm's recent Q1 earnings report, which revealed a cash balance of $96.5 billion, and the tax cuts for business owners expected under the Trump administration. According to Buffett, while lowering tax liabilities on investment gains would be a huge benefit to the firm's stakeholders, some of that savings would also be passed on to Berkshire's customers—as well as the customers of its many businesses and subsidiaries. Still, Buffett said, the tax cuts aren't necessary. e firm has managed the high corporate taxes levied against it for years and still "thrived." FANNIE MAE INCOME DROPS IN Q1 Fannie Mae reported $2.8 billion in both net and comprehensive income for the quarter, the exact amount of the dividend amount it expect to pay the Treasury Department in June. But that income for the quarter was nearly half what the government-sponsored enterprise (GSE) reported in Q 4 of 2016. In January, Fannie reported $5 billion in Q 4 net income. e GSE attributed the decrease to significantly smaller increases in interest rates in the first quarter of 2017 as compared to those in Q 4. "Large increases in longer-term interest rates in the fourth quarter of 2016 resulted in substantial fair value gains on the company's risk management derivatives for the quarter, as well as credit-related expenses that partially offset these gains," the report stated. "By contrast, interest rates increased only slightly in the first quarter of 2017 and therefore did not have a substantial impact on the fair value of the company's risk management derivatives or its credit-related income for the quarter." Net interest income for the quarter was $5.3 billion, compared with $5.8 billion for the fourth quarter of 2016. Fannie attributed the drop to lower amortization income from mortgage prepayments as a result of "lower refinance activity and lower interest income due to a decline in the average balance of the company's retained mortgage portfolio as the company continued to reduce this portfolio." Net revenues—net interest income and fee and other income—were $5.6 billion in Q1, compared with $6.2 billion in Q 4 of 2016. at net income came primarily from the guaranty fees Fannie receives for managing the credit risk on loans underlying mortgage-backed securities held by third parties and the difference between interest income earned on the assets in its retained mortgage portfolio and the interest expense associated with the debt that funds those assets. Once June's $2.8 billion dividend is paid, Fannie will have paid a total of $162.7 billion in dividends to the Treasury. Despite the near halving of net income, Fannie Mae President and CEO Timothy Mayopoulos said in a statement that things aren't as bad as they appear in the Q1 report. "Both the market and our operations continued to strengthen, and our progress was reflected in another profitable quarter," Mayopoulos said. "We look forward to advancing our vision to create a digital mortgage process and make new strides in our efforts to encourage the creation of affordable multifamily housing." FDIC-insured banks and savings institutions brought in $44 billion in income in the first quarter of 2017, according to their quarterly banking profile released in May. KNOW THIS

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