(Before we get to the heart of the matter, in the interest of full disclosure let me state upfront that my personal accounts, as well as those of business(es) under my control, own shares of Wells Fargo & Company, Berkshire Hathaway, E-Trade Financial, U.S. Bank, and includes trading relationship with U.S. Bank, Charles Schwab, and E-Trade, among others. After this article is published, I’ll make no attempt to update this information and may buy, sell, or hold any stocks or assets mentioned. This piece is not meant to provide you with financial advice or discuss the merits of any particular stock, but rather it represents some internal discussions with friends and colleagues about what we would like to see happen both from the viewpoint of a customer and an investor.)
My financial life is complicated.


In one manner or another, my balance sheet includes relationships with Sovereign Bank, U.S. Bank, U.S. Bancorp Investments, E-Trade Financial, Fifth Third Bancorp, Charles Schwab, Capital One, American Express, MBNA, Mellon Financial, AIG, Blue Cross Blue Shield, and … you know what? I’m going to just stop right now. As someone who craves simplicity, this isn’t making me feel any better. That’s why I’m optimistic about some of the recent rumblings that are making their way down to Main Street from Wall Street. It’s possible that a solution could be on the horizon thanks to the recent troubles at E-Trade.

If you haven’t been following the situation, let me provide a quick update. E-Trade Financial, one of the world’s largest and most successful online brokerage companies, has made some serious capital allocation mistakes by putting a large part of the firm’s assets into a collateralized debt obligations (“CDO’s”), which are supported by things such as credit card receivables, car loans, and almost anything else you can imagine.

Now that the credit market has contracted, the expected value of many of these securities has fallen because Wall Street can’t gauge the likelihood that they will be repaid. If there is one thing analysts hate, it’s uncertainty because it makes them, and portfolio managers, look bad if they are wrong. As the saying goes, one lemming walking over a cliff never gets the blame. The result has been some rather loud noise made by analysts and short speculators about the health of the company. Yet, if you speak to almost anyone in the brokerage industry, they would agree that as long as E-Trade’s clients don’t pull their money out en masse, the core business is spectacular, growing both domestically and internationally, boasting both fee and interest income.

The Opportunity to Develop Multiple Accounts per Customer

Given the goals espoused by the management team in the past few annual reports, it might make sense for Wells Fargo to acquire E-Trade. Why? Roughly six months ago, I went shopping for a single, integrated financial company where I could keep my personal, and business, accounts; we’re talking everything from banking, insurance, and retirement accounts to active trading brokerage, lines of credit, and capital markets for our continued expansion at one of the manufacturing companies. My family and I had grown weary of dealing with a dozen different firms as our needs had grown increasingly complex. We came within a hairs-breadth of switching everything to Wells Fargo, despite the fact there isn’t a deposit-taking branch within hundreds of miles, but in the end, just couldn’t do it due to the relative weakness of its trading platform. I love having 30” Apple HD Cinema monitors lining the desks of my office, each tapped in to real-time quotes of our holdings at each of the businesses. As a value investor, I’m able to pre-program in my desired purchasing levels and am alerted when and if the trades are executed. This allows me to monitor, research, and patiently wait for companies that we want to own at attractive price levels. That one, seemingly small difference caused me not to move dozens of accounts, creating a deep bond with an institution that has one of the only AAA credit ratings in the world; and I had more incentive than most customers – I, my family, and several of our businesses own shares of both Wells Fargo and Berkshire Hathaway, which itself owns a large chunk of the bank.
Now, putting aside the attractiveness of being able to move all of your accounts to a single institution, consider for a moment that the acquisition of E-Trade by Wells Fargo would, in one stroke of the metaphorical pen, erase any doubts about the company’s ability to survive, halting any exodus of customers that may or may not be occurring. Combined with the powerful, extensive branch network the bank has established over the past century, what would emerge would be nothing short of a trading powerhouse. Those who wanted self-service could continue to handle all of their accounts online, with their more timid (or traditional) brethren walking into local bank branches to talk directly to a broker or customer service representative. The losses that are currently on the balance sheet could certainly be factored in to the acquisition price and represent just a quarter or two of WFC’s annual profit; a small price to pay for a business that is otherwise very profitable and could bring a level of technical sophistication that not one of the other major money center banks currently boast. After all, have you spent anytime looking around at the trading interfaces of banks? It’s like your grandma designed a web site using a college textbook she picked up at Borders or Barnes & Noble. The failure of this country’s brick and mortar institutions to develop something more intuitive, powerful, and streamlined is pathetic.

As a customer, I’d be thrilled. As a shareholder of both firms, I’d be ecstatic. If the deal were consummated for cash, I’d even consider rolling over the proceeds into Wells Fargo stock.