Wells Fargo exec. says lenders failed the prudent test

PORTLAND — As chairman and the former chief executive of Wells Fargo, Richard Kovacevich led the nation's fifth-largest bank during the run-up to the mortgage and housing crisis.

Though Wells Fargo avoided the worst of the downturn by treading lightly with subprime loans, the San Francisco-based bank hasn't been immune to the impact of the crisis on the financial-services industry. It recently set aside $3 billion to cover loan losses.

At the same time, Wells Fargo's relative strength positioned the bank to snap up weaker rivals, including a small Texas bank just last week.

Kovacevich, who grew up in Enumclaw, was back in the Northwest recently to speak to Wells Fargo's Oregon employees. He also sat down to recount lessons learned from the mortgage crisis and thoughts on his impending retirement.

Q: In the run-up to the mortgage-lending crisis, what did banks do well and what did they do poorly?

A: We don't have to take much time on what they did well. The problem was just excess. It started doing the right thing, trying to get more people into homes. And then it reached levels that were, quite frankly, totally inappropriate.

By the time it reached the 2006 and 2007 periods, loans were being originated to people who did not have the financial wherewithal to pay the mortgage. This caused the entire market to get into a bubble we're now paying a price for. The industry should have known better.

Q: If you could go back three or four years, what things stand out that you would have done differently?

A: We did a really good job of saying that, for subprime borrowers, these housing products (which lowered qualifying standards for loans) were inappropriate. And since we didn't participate in that part of the market, we really didn't realize the excesses that were going on that caused the entire market to get way overvalued — prime, subprime, low-priced houses, high-priced houses.

We should have put that together and said, "Let's be worried about the prime side over here." We wish we would have been more prudent on the prime side.

Q: I had a conversation with U.S. Bank's Richard Davis in April and he thought it's going to take another year to work everything through. What's your forecast?

A: If I had to pick a date, I would pick that home prices will bottom out by the middle of 2009, with equal probability that it could happen three or four months earlier or later. We're already seeing some early signs we're moving in the right direction.

The sales of foreclosed homes were at an all-time high last month. The point is it started to move the merchandise. In a very well-priced house today, at least in California, you could have eight or nine buyers as you auction these things off. People are seeing these are prices they may never see again.

These are early signs. I'm not saying we're there yet. If the economy suffers more than it has been, it may take longer.

Q: You're retiring this year when you hit Wells Fargo's mandatory retirement age of 65. Is that policy necessary in an era when older people are so vibrant, or was it established because companies need new blood from time to time?

A: I put that [policy] in when I was young and didn't know any better. Now I've got to eat my own cooking!

For a large, complex company like a Wells Fargo, 10 years or so as a CEO is about all you should have. It gives you a chance to get a lot done but it's also time to make a change and give someone else a chance to see if the policies and practices that made sense then make sense now.

You can use age as a factor in that. Everyone knows that's the case, so you can prepare accordingly.

I'm not here to say you can't still be a contributor at 65, but I do think 10 years or so is about as long as [someone should be running] a large, complex company. That's what it was put in for, more than age.

Q: Your name was mentioned with the recently vacant Wachovia CEO job. Do you see yourself running a bank again?

A: No. The advice I've been given by my colleagues who have retired is you don't change anything for at least six months, as far as getting a new job or getting off a board or getting on a new board.

Just take six months and try to live life. It sounds like it's withdrawal from drugs or something.

And then, even when you start adding or subtracting, do it in small bits, and you'll be surprised that you don't want to work 100 percent of your life anymore. That 50 percent of your life for yourself is not all bad.

Now, I find that hard to believe. I hope to be surprised because I am not looking forward to this. I've been working all my life.