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This Is a Very Good Point About Wells Fargo and U.S. Bancorp

There is no such thing as a biohazard suit for the bank industry.

The two best-run big banks right now are Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB), but shareholders in even these companies must stay vigilant, as today's darlings are often tomorrow's pariahs.

"Wells Fargo and U.S. Bank look great now, but that stems, in large measure, from the fact that their business strategies during the economic downturn were relatively simple retail strategies (with minimal reliance on trading, investment banking income)," says Eric Fischer, senior fellow at Boston University Center for Finance, Law & Policy, and a former general counsel of UST Corp., a Boston-based bank holding company. "In my experience almost all 'heroes' tend to lose their luster over time."

To Fischer's point, history is replete with examples of respected financial institutions that were forced into insolvency seemingly overnight:

  • The 1857 failure of the Ohio Life Insurance and Trust Company ignited the Panic of 1857. "The high credit enjoyed by that concern, and the fact that its solvency had hardly been questioned, made the failure a matter of [...] importance," the New York Herald reported at the time.
  • The 1873 failure of Jay Cooke & Co., the most highly reputed investment bank during and after the Civil War, triggered the Panic of 1873 and subsequent economic depression.
  • The failure of the once-esteemed Knickerbocker Trust Co. set off the Panic of 1907.

And the list goes on, as Fischer himself witnessed:

When I joined Bank of Boston in 1976, the large bank model, which the 50 largest banks tried to emulate, was Continental Illinois in Chicago, [the seventh largest bank in the United States at the time]. Only a few years later, Continental Illinois had to be rescued by the FDIC with emergency funding being provided by the other 25 largest banks (including Bank of Boston, i.e., The First National Bank of...