David Weidner notes that there’s something interesting about Wells Fargo clawing its way to the top of the charts to become America’s No. 1 megabank by earnings—it’s also America’s most boring megabank.
Which is to say that more so than the other large financial institutions in the United States, Wells Fargo is mostly in the business of banking—loans and deposits—with a bit of upselling prosperous clients into brokerage accounts. It does have an in-house investment bank, but it’s quite small relative to the size of either Wells Fargo as a whole or to the major investment banks in the United States. Wells Fargo is essentially an agglomeration of medium-sized regional banks into a nearly nationwide banking giant, but it doesn’t do very much in terms of exotic finance.
Where I think Weidner goes wrong with this is in thinking that this clearly makes Wells Fargo a safer banking entity than its more complicated peers.
The fact of the matter is that “boring” banking can be plenty risky. If you look at the pre-crisis banking systems of Spain or Ireland, they weren’t into much in the way of esoteric trading. Spanish and Irish banks blew up because they made lots of loans to finance investments in Spanish and Irish real estate. For that matter, the main reason Wells Fargo is so big is that it took over Wachovia in 2008 in an FDIC-forced sale induced by Wachovia’s failure. Wachovia failed largely because of the slightly exotic mortgage lending of its Golden West Financial subsidiary—ARMs and other high-risk mortgages—but still really just because of real estate lending.
The most “boring” of all banking activities—leveraged real estate investments—just happens to be pretty risky. Sometimes real estate prices go down and you lose a ton of money. Now if we were back in 2005 you might say that Wells Fargo is so big and geographically diversified that it’s safe because a systematic nationwide decline in real estate prices is incredibly unlikely. Regional real estate booms and busts happen all the time, but not national ones. And yet now we know that national declines can happen too. So the risk is all still there. It’s just kind of boring risk.