Recently, I made an investing decision that I never thought I’d make: I sold the vast majority of my Toronto-Dominion Bank (TSX: TD) shares.
I made the move after hearing that TD was under investigation for poor money-laundering oversight in the United States. The claim that a bank isn’t handling money laundering right is a serious one, because money laundering is mainly an activity carried out by organized crime. If a bank is found guilty of aiding gangs and cartels, the resulting fines will likely be large.
The money-laundering investigation is not the only ethical issue that TD has to deal with. The bank has also been accused of shoving clients into accounts that they don’t want or need. Pushy sales practices like this resulted in Wells Fargo having to pay billions’ worth of fines over the last decade.
Bank ethics matter
One reason why TD Bank’s Department of Justice (DoJ) investigation is a big deal is because banks that get caught violating regulations tend to be punished harshly for it. You might be thinking, “Wait, didn’t they say back in the 2008 financial crisis that the bankers who caused these problems walked away scot-free?” Yes, the bankers did, but their shareholders, in many cases, didn’t. You see, bank chief executive officers and other high-ranked bankers aren’t always personally liable for their companies’ misdeeds. The company, however, is. So, the fact that bankers walked off scot-free in 2008 doesn’t contradict my claim that banks are punished harshly for regulatory violations. What I mean is that the banks are punished harshly at the corporate level.
For proof of this, look no further than Wells Fargo (NYSE: WFC). Wells Fargo is a U.S. bank that got caught forcing clients into accounts/products they didn’t ask for. As a result, it paid several fines and legal settlements, including the following:
- A $3.2 fine for loan management violations in 2022
- A $185 million fine in 2018
- A $480 million payout in a class-action lawsuit
- $142 million in another class-action lawsuit
- $575 million in a lawsuit brought by several states
These amounts sum to just about $4.6 billion, showing how much banks can suffer when they’re caught with their hands in the cookie jar. And you don’t need to take my word for it: Warren Buffett says the same thing. Buffett famously sold his Wells Fargo shares after the company’s account fraud scandal broke. Since then, he has been bemoaning bank ethics violations at his company’s annual meetings, including the one that occurred in January of this year.
I’d probably buy back cheaper
When I saw the parallels between TD Bank and Wells Fargo, I sold the vast majority of my stock (over 90% of it). Still, I own a little bit to this day, and I’d probably add to the position if the stock got cheaper. If TD Bank fell to a level where it was trading at eight times earnings or below book value, I’d likely start building up my position again. I don’t see that happening anytime soon, but my eyes are open to the possibility.
