Activists face a big challenge taking on Wall Street banks

Mayo: 2017 to be make or break for James Gorman

Wall Street's top banks face a growing chorus of activist investors with which they must contend.

But certain CEOs probably need not worry — as long as they have Warren Buffett in their corner.

Activist investors have nudged companies in other sectors to bump up dividends and make management changes for years, emboldened to take on increasingly bigger targets.

More recently, as expected, they have turned to Wall Street banks to see if they can juice returns.

This week, ValueAct Capital revealed a position in Morgan Stanley, sending the stock up. Activists cannot force Wall Street banks into dividends or buybacks (as those moves must be approved by the Federal Reserve) — so changes to the C-suites are one potential route for activists to take.

Bank of America, according to a Wall Street Journal report, may also be targeted by activist investors.

Buffett isn't a major stakeholder in Morgan Stanley, but he has a keen interest in Bank of America, after he put up a $5 billion bet on the bank in 2011 that proved wise. Further, Buffett has supported chairman and CEO Brian Moynihan through thick and thin, including last year's successful campaign to appoint the CEO to the chairman role — a vote which ran into opposition with some of the bank's other investors.

"Buffett has a lot of leverage because he owns a lot of stock," said Christopher Whalen, senior managing director at the Kroll Bond Rating Agency. "They don't want him to sell. It would take the stock down, so he can exercise significant influence on management."

Warren Buffett
Lacy O’ Toole | CNBC

A representative for Buffett did not respond to a request for comment. A Bank of America representative also declined to comment. A Morgan Stanley representative said: "as with any investor, we welcome ValueAct as a shareholder."

Regulations prevent any single investor from amassing a stake of more than 10 percent in a big bank.

But Buffett's reputation and following is such that his signifying he'll vote one way, or another, could have a ripple effect far greater than his position dictates.

Buffett is also a major stakeholder in Wells Fargo and U.S. Bancorp. But even at a time when hedge funds are emboldened to take on the biggest companies on the S&P 500, the CEO of Berkshire Hathaway has stayed far away from making his voice heard in shareholder beefs with management, and tends to support executive leadership.

Activist investors that picked banks including Comerica, earlier this year, and Morgan Stanley, did so knowing they would not have to contend with Buffett, said another industry source, who asked to not be quoted directly.

Thanks to his clout — and pocketbook — Buffett reportedly seeks to increase his position in Wells Fargo beyond the 10 percent threshold currently permitted by the Fed (with regulators' blessing, of course).

"We value Berkshire Hathaway as a long-term shareholder and customer, and we appreciate the confidence that Berkshire's executive team has shown in Wells Fargo," a representative for the bank said.

Increasing his stake, Whalen said, will give Buffett even greater influence on the bank's board. But it also provides a higher degree of protection to Wells Fargo, just as long as they keep Buffett happy.

"The activists are an indication of what we all knew: the banks are under-performing," Whalen said. "But the Fed's change-in-control rules make it hard to really put pressure on a bank to change unless your name is Warren Buffett."