Charlie Scharf

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0:26One of America's most experienced financial service executives is Charlie Scharf. He's currently the CEO and chairman of Wells Fargo. Previously, he'd served as CEO of Visa and CEO of BNY Mellon. He's also held senior positions at J.P. Morgan and Citicorp. Recently, I had a chance to sit down with Charlie Scharf and meet with him in Washington, D.C. to talk about his extraordinary career. Right now, the Federal Reserve has a chairman, Jay Powell, and obviously there's some dispute about whether he should be investigated or not, at least in the view of the president. What is the view of the banking community?

1:01Do you think the Fed's independence is being compromised? The independence of the Fed is critically important, not just here in the U.S., but in other parts of the country. And when you think about just the way our governing system works, it's different than a place like China, where there's long-term management, long-term goals, high coordination across all the different areas of government. You know, here we have, you know, a political infrastructure that turns over, which has points of views. And we have a more long-term structure in place at the Fed. The committee vote is extremely important.

1:39And so, you know, creating the right kind of balance between physical and monetary policy to get to the best outcome is extremely important. There's no reason in my mind why the president shouldn't have a point of view. All presidents have for a long period of time. They've done it in different ways. This president does it very vocally in terms of what his points of views are. But even as it comes to who he's choosing to nominate for the Fed, in this case, he's chosen someone who has a point of view on what's going on in the world, AI, what it's going to mean for jobs, what it's going to mean for productivity, and it's got to be approved by Congress.

2:17But this idea that there's total separation is just not true. But it is true when it gets to the actual decision making. Eventually, the person nominated by the president will be confirmed. Do you think it would be difficult for him to lower interest rates at this point, given where the economy is? Yeah, I think right now there's pretty clear consensus that it would be the wrong thing to do. Until the Iran conflict is clear what the end is in sight, there's real risk out there. I mean, I think as you hear voting committee members talk about it, there's a high degree of consistency, including, I think, from the Treasury Secretary in terms of waiting to see how this all plays out.

2:56And that seems like the prudent thing to do. What do you think the impact is on the economy of the war today? Right now, from everything that we see, the economy is still extremely strong. We all just reported our first quarter results in the banking space. loan demand is decent delinquencies on the consumer side are extremely well controlled consumer spend is growing on a year every basis they're spending more money on gas but making adjustments in some of the other categories businesses have gone into this in strong financial shape so those are all the good things but then when you ask them how they feel, everyone's nervous.

3:36And so, you know, they're not laying off, but they're not hiring to the extent that they would hire. Neutral to just beginning to see some potential for some negative impacts. The real question is going to be is, how long does oil and gas prices stay high? People always think about, you know, the gas pump, but it's all these other things that matter. They're fine for a while because they have long-term contracts to buy some of these things, but that will come down the pike. And if the conflict ends, the straits open up, production returns in some reasonable period of time, there will be this impact on consumer spend on some of these other things.

4:17But in that kind of environment, it won't be damaging. If this goes on for a longer period of time, it can be more damaging. Is it better for banks generally if interest rates go up or go down? There's the short-term impact, and then there's the longer-term impact. You know, we have a lot of money where we pay zero rates. And so when what we earn falls, then that squeezes our margins because we can't lower zero what we pay customers or 0.5 basis points. Rising rate environment is certainly helpful for something like that. But what's most important is like, what are the reasons underlying it? Because the amount of money that we'll make in any given quarter from a favorable interest rate curve for us is de minimis compared to what it does to the underlying base of our customers.

5:04So if the economy is healthy, the economy is growing, inflation is under control, people are growing inventories, people are spending, that's what's going to really drive profitability of banks. 95 % of our revenues come from the U.S. We really live and breathe by the success of the U.S. customer and the U.S. business. Are you worried about the value of the dollar? The The dollar has gone down since President Trump has been in office. I think it's something we've got to be conscious about. The position the US dollar has in the world, we can't assume that we just have this God given right to be the reserve currency.

5:37But it's going to take a long time for people to get comfortable with something else other than the dollar. And it's in our control. What about the US debt? We have$39 trillion of debt. And that's one of the issues that's got to get solved, because you've got people who were in office for four or eight years. They've got their own agenda on what they want to accomplish. They're not going to be there to solve that problem. And they don't have the same kinds of immediate pressures that companies have when they become overleveraged. Recently, the concern has been in the financial community about something called private credit.

6:11So is that legitimate concern? Is private credit about to crumble in some way? No, I don't think private credit's about to crumble. And when you look at private credit, when you just look at the size of private credit. It's not big enough to be a systemic risk, broadly the way we think about systemic risks that have existed in the past. But it's credit. And there's been a huge amount of money that's flown into these products, both institutional and retail. And we've all seen this in the past when there's a lot of money that needs to get invested, because that's the only way that these firms get paid is to actually invest, it doesn't always work out well.

6:50And we're in an area where we've been in this bull market for a long period of time. We haven't seen any recession in over a decade. You will see credit deterioration at some point in time. Has AI changed your job very much? Do you use AI in running Wells Fargo? I personally do. We've enabled most of the company with some of the basic AI tools, but we're at the very beginning. And we're kind of going through pieces because we've got to monitor it in a couple of different ways. Number one is how we use the tools ourselves to either become more efficient or deliver differentiated products and services for our customers.

7:26Number two is we lend a lot of money to a lot of people. And so understanding how AI is going to impact their businesses matters a lot to us. And then we've got the question of just like, how is AI going to change our business model? We're most advanced in that order, but we're towards the beginning of it. But it's incredibly powerful, and we're going to see meaningful benefits. Revolut is a company with now a private market value of$75 billion, headquartered in the UK. And now they're trying to get a US banking license. Does that worry you as a potential competitor to Wells Fargo and other banks like yourself, that they could build a whole banking system without any bricks and mortar?

8:06We think about the competitive advantages that we have versus who we compete with. When you kind of step back and look over the last 10 or 15 years and say, you know, what have the fintechs done to the banking space? I think first and foremost, it's made it very clear to people who run banks that the moats that have existed that have allowed you to move slowly are no longer going to protect you. In fact, you've got government and regulators that are telling you you need to do more. So banks have woken up to the fact that you have to compete not just with regulated institutions, but non-regulated institutions.

8:42And we come at this with this great position of strength, which is we have trust. We have the FDIC insurance. We have a huge customer base. When you're in a big company, you sit and look at small companies and say, oh my God, look how quick they can move, the great products, they understand the customer, All those things are true. And then when you go to one of those companies, you look at a company like us and say they have 70 million customers. And if they were to get some of these things right, think about how hard it's going to be for us to compete with them. So it puts a huge amount of pressure on us to have to deliver things in different ways if we didn't have that kind of competition.

9:19but we know it's our sponsor wells fargo recently spoke to christian strack president of pimco about how the fixed income investment manager is helping clients build portfolios for the future we are in a moment of radical change in technology and finance those will bring radical risks and radical new opportunities we wanted to look back and say that we have brought clients these opportunities in these times of change but also helped clients understand the risks along the way with wells Fargo. It really is a partnership around complementary capabilities. Discover how Wells Fargo is helping PIMCO and other clients reach the next horizon at Bloomberg.com slash the next horizon.

10:00So today on Wells Fargo, what is your, the market capitalization, the market value today of Wells Fargo is what? 250, 260 billion. Okay. And how many employees do you have? 200 ,000. How many customers do you have? 70 million. Wow. That's a lot. And what about credit cards? You have a big credit card? Credit cards, 20-something million cards. Have you ever used a credit card and had it denied?

10:27The truth? Yes. I get to Wells, and first thing I want to do is get a Wells Fargo credit card. And so I get the new card, and I was out to dinner with some good friends who run some big companies, and I pull out my card, and I got denied. Is that person in charge of that division still there? We've learned an awful lot. It doesn't get denied anymore. But it hasn't happened since. It hasn't happened since. OK. What about the ATM business? Is that a profitable business for banks? The ATM business, it's marginally profitable, but it's important. It's convenience. And cash is becoming less important over a period of time.

11:07People are able to deposit checks on their phones and not having to go to ATMs anymore. But it's a little like branches. We can debate about what the future is going to look like in 20 or 30 years, but customers tell you what they want and what they like. And they like convenience. There's still plenty of cash that circulates out there, especially in our customer base. And until they stop using ATMs, we're going to still have them for them. Let's talk about your background. Where were you born? I was born in Manhattan, raised in New Jersey. What did your parents do? My dad was what at the time was called a stockbroker.

11:44Now we call it a financial advisor. He worked till he was 77. Loved the markets, still loves the markets. My mom was a teacher because she wanted to be able to be there when we came home from school. And then ultimately went to work at AT &T and went into technology. Where did you go to college? Johns Hopkins. I wanted to be a research chemist. Really? And I loved science in high school. I loved math and I loved science. My parents were always encouraging of learning broad things and trying to find what you wanted and both my brother and I were both very much math and science people and I go to Hopkins and I First semester I take organic chemistry Where you're in with all the Hopkins pre-meds, which was probably the worst experience of my life All right, so you said I want to be the head of a bank.

12:31No banking was like not just not was not there yet I said I want like a better education I want a much broader education. And I just got convinced in talking to people that college is this great opportunity to learn a broad set of things. I've got nothing against business schools or things like that, but there's plenty of time to learn accounting. Most of that stuff you learn on the job anyway. College is a great example to learn about international relations, political science, psychology, sociology. So I changed my major to what Hopkins had this wonderful thing called Social and Behavioral Sciences Area Major, where you were allowed to take a broad set of classes and all those types of things that I just said.

13:11And I loved it. I loved the people. I loved the professors, the students. I loved the work. And I think I'm a better person for it. So you graduated what year? I graduated college in 87. And so I started going through all these interview programs with the different investment banks up in New York because I was from the New York area. And then something else came along. So you got a job at a place called Commercial Credit. A young guy was working there, then Jamie Dimon, I think his name was. Jamie was 29, 30 years old at the time, was CFO, played a really important role. But he was one of like six or seven really senior people.

13:55and it was really over the next three, four, five, six years that Jamie asserted himself in terms of what his capabilities were. One of the things when I talk to younger people all the time, I say, they always ask about who your role models and who do you learn the most from and for me, it's just being able to see, you think you can learn a whole lot from someone who's the most successful but in reality, you learn bits and pieces from different people and figure out how it works for you. How long were you at J.P. Morgan before you left? I was there until 2012. So I got to Bank One in 2000. I started out as CFO, wound up running the retail businesses for a couple of years.

14:35When we sold Bank One to J.P. Morgan, I ran the retail businesses until 2011. Then I had a year in the private equity business. And then I went to run Visa. So you went to Visa. But Visa is headquartered in San Francisco and your family is in New York. So my wife eventually moved out to California. Our kids were on the East Coast. You say moved out. She moved with you. She moved. She didn't move out. She moved with you. She came to join me. Right. OK. With the dog. OK. We were all reunited in San Francisco. And then it just became very clear for personal reasons with one of my kids that we just couldn't be that far away.

15:12OK. So you moved back to the East Coast. So I left Visa without a job and moved back to New York. Why would you want to go to a bank that can't grow? So how did they induce you to leave where you were? First, I was very hard to leave because I was at Bank of New York Mellon, which I went in maybe a year and a half before I started these conversations. And I didn't intend to leave. I intended to stay there for the rest of my career if they would have had me. But I knew someone on the Wells Fargo board from another board than I'm on. And he was on me about you should engage. You should engage. You can be in New York.

15:47We have a lot more in New York than you think, which was important to me. and then I just kind of go through what Wells is and I competed against them for years and I believed and I believe today more than ever it's an incredibly important amazing financial institution in this country which lost its way on a series of things and if you sit there and say if those things are all fixable and someone were to hand you the Wells Fargo franchise that had been underperforming, that had been restrained for so long, that's like a dream job. So, you know, you got to take the risk that you believe you can get through these problems with the government, by the way, in a difficult environment with the Biden administration.

16:30But if you come out on the other side, it's incredibly exciting. Before you came to Wells, they had a problem. And Wells was put under some constraints by the federal government. What were those constraints? We had multiple constraints. The biggest one that people know about is there was an asset cap put in place. So at the time, I think it was 2018, we were told that our assets at the time were$1.952 trillion, and they couldn't go higher than that until the consent order work was done to their satisfaction. Well, how do you grow the company if you can't grow your assets? It's very, very hard.

17:15So there are things you can't do and there are things you can do. You've got to be, first of all, very selective in looking at your balance sheet and saying, OK, it's not the worst thing in the world to say we need to become more efficient on our balance sheet. What's less efficient? Where do we make less money? How do we reallocate that balance sheet usage? You then turn to certain things and say, we're just not going to be active about soliciting loans. We're not going to be active about soliciting deposits. We were very careful not to throttle consumer deposits because you tell a consumer to please bring your deposit elsewhere and you've lost that relationship.

17:48Large corporates understand. They understand we have an asset cap. They understand we want to take their money, but we just can't right now. So we turned away massive amounts of deposits at the time. And we focused a lot on businesses that drove fee-based revenues. So we've grown our credit card business dramatically, which includes a significant portion of increasing the spend. We've grown our trading capabilities. We've grown our investment banking advisory capabilities. We have our fee-based treasury management businesses. And so that along with our wealth management business, we get paid on fees.

18:23That's what we focused on. What led to these sanctions? Why did this happen? There were a series of individual things that the regulators identified. They were right about them. We can argue about whether the punishment fit the crime, whether an asset cap was the right thing to do for a company like ours, but they weren't wrong about the underlying issues. And what happens is you get to the point where if you're not resolving the issues quickly enough, they say, okay, we need to get your attention. We're not getting your attention. So the next step is you can't grow. And so that's what they did.

18:57We need banks of all sizes. Our banks do have to scale with the growth in the economy. It doesn't mean that big versus small. Both are necessary. We do different things. And we try and support small banks because we know they play an incredibly important role. You're in town, I guess, to meet regulators and to meet members of Congress. How do you find that an uplifting experience when you're meeting with members of Congress or exciting? I think it's incredibly important. And I really dislike when people talk about lobbying like it's some awful, horrible thing. Showing up and trying to convince a senator or a congressperson at the last minute that what I think is right, when it's clear that it's just going to benefit me, goes nowhere.

19:41What really matters is over a period of time building a relationship with members and their staffs where you're honest about what works, what doesn't work, what the risks are, and so that when they need to actually have a position on something, They're more educated and sometimes we agree on those things. I mean there I mean there are plenty of members who I've got a huge amount of respect for we don't agree on something But it doesn't mean I'm not going to talk to them and it doesn't mean that we might not agree on the next thing What is the biggest problem the United States is facing now in the financial service world?

20:17We have uncertainty with what's going on with the Iran conflict. It's been a bull market for a long time There's a huge amount of liquidity in the system There's this underlying current that things are going to be fine for a long period of time There are a lot of people in the financial services space in banks and outside of banks that have never been through cycles like a real cycle in terms of what that means And there's a point in which that's going to turn and that's gonna have a whole bunch of impacts That I'm not sure we all really understand something's gonna happen But then more long term.

20:51It's just the question of the deficit J.P. Morgan, Citi, Bank of America, and Wells Fargo. Do you think only having four gigantic banks is the right number? We have 4 ,000 banks in the country. And when we think about financial services, you really do have to think beyond banks these days, right? You talked about private credit. $1.7 trillion of lending is now done away from banks. You've got all of the different things that are being done in the private equity space. And so the definition of what's done in the banking sphere has changed very dramatically. We need banks of all sizes. We're not going to have branches in every location.

21:32We don't have the relationships that they have. The standards that we have to live with under when it comes to lending are different than small banks do. If you're in a small bank in a local community, I'll make a loan to you based upon what I know about you. I knew you as a kid. I knew your parents. I know you're going to pay me back. I know exactly what you're going through. We can't do that. The OCC is going to come in and they're going to say what are you crazy? No way. So we need a broad cross-section of banks to serve people locally We have big companies in this country and we need big banks to do things for those companies Netflix decides that it wants to enter the bidding fray for Time Warner.

22:07They called us in we were involved in the transaction We made a 30 billion dollar commitment Those things have to get done if we're going to continue to see the capital markets activity and you need big banks to do that And if it's not us, it's going to be the Europeans. It's going to be the Japanese who are coming back, ultimately the Chinese. And so our banks do have to scale with the growth in the economy. It doesn't mean that big versus small. Both are necessary. We do different things. And we try and support small banks because we know they play an incredibly important role. So what is the most profitable part of the business for big banks?

22:46We have looked at all of the things we do within Wells. We've sold 22 businesses. We did it to eliminate hobbies, to get rid of things that we just weren't interested investing in. We have four big lines of businesses. We're incredibly excited about all four. All four have really strong returns, have really great growth prospects. Our consumer deposit lending business. It's our wealth management business where we have 12 ,000 some odd advisors across the country. It's our commercial bank where we've got almost 15 % share in a lot of the things that we do. and that's our corporate investment bank.

23:20All of them have very strong returns and strong opportunities to grow. And they fit together inside the Wells Fargo franchise to allow us to have just a greater breadth and greater depth of what we can do for customers. Thanks for listening. To hear more of my interviews, you can subscribe and download my podcast on Spotify, Apple, or wherever you listen.

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