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What Makes Wells Fargo & Co (WFC) a Special Business?

Competition does not stack up

It is clear to most investors that Wells Fargo is a better bank than Bank of America and Citigroup. Both of the latter banks suffered mightily during the financial crisis and likely would have been insolvent without government support. Bank of America still suffers from enormous legal risks in connection with its activities leading up to and during the financial crisis, many of which cannot yet be quantified.

Citigroup, on the other hand, suffers from a culture of trading long-term viability for short-term profits — a culture that is not easily changed. The bank is now an enormous international financial services firm, with a presence in nearly every product market in finance. It will be difficult to manage risk at an institution that is more complicated than many of its peers. In addition, the bank’s large bet on emerging market credit may prove unwise; if the Chinese economy slows down, Citigroup could suffer substantial losses while its peers continue to improve.

Many investors hold Wells Fargo & Co (NYSE:WFC) in the same regard as Chase bank. Although Chase has a great leader in Jamie Dimon, it does not have a “Jamie Dimon culture” that will survive after his departure; at least nothing compared to Wells Fargo’s deeply-ingrained customer service culture. When Dimon leaves, so will much of Chase’s special-ness. But when John Stumpf leaves, someone on Wells Fargo’s deep bench of long-time executives will step in and continue operating in according with the bank’s culture and values.

In addition, Chase is a much more complicated bank than Wells Fargo. Even Jamie Dimon could not stop a poor decision by a trader in London from costing the bank billions along with an enormous hit to its reputation. Although Wells Fargo executives cannot know what is going on in every aspect of its business at all times, its simpler business model makes a London Whale-like event much less likely to occur.

Bottom line

Buffett did not make an exception to his history of owning special businesses when he bought Wells Fargo. Although most banks can be lumped together, Wells Fargo stands apart from the crowd. Its unique culture enables it to earn the highest return on assets in its peer group and it will continue to generate above-average returns for years to come.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc (NYSE:C) , JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo.

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