As was widely anticipated, Wells Fargo Chairman and CEO John Stumpf resigned yesterday. The bank presented the departure as voluntary, and if so, that speaks volumes about the complacency of the board in the face of an ongoing scandal that has already taken 20% off the market capitalization of the San Francisco bank. The forcing event appears to have been that Wells’ quarterly investor conference call is scheduled for Friday. Having a new CEO sell the story that Wells was putting the scandal behind it would clearly be more credible than having Stumpf peddle that pitch. Mr. Market seemed to agree, since Wells’ shares traded up 2% when the S&P 500 was virtually flat.
However, the bank hasn’t taken moves consistent with housecleaning. One of the big themes of the Congressional hearings, particularly the House Financial Services Committee session, was that Wells has a diseased culture. We presented plenty of evidence not just of Wells foreclosure abuses, but also of a peculiar combination of institutionalized bad practices with a bizarre smugness, an unwarranted belief that it was morally superior. In keeping, when Stumpf was hit again and again with the evidence of corporate procedures that would require many employees to cheat to keep their jobs, Stumpf appeared to genuinely believe that his bank had integrity, that any problems, as Ben Bernanke would have put it, were contained.
As expected, Wells elevated an insider, Timothy Sloan, to the role of CEO. It also split the role of chairman and CEO, a long-overdue good governance basic that TBTF banks in America have resisted. However, a current board member, lead director Stephen Sanger, who comes from corporate America, and not the financial services industry, will become chairman. It would have been a more convincing move to have a respected outsider such as Shiela Bair take that role. Of the ten biggest banks, Citigroup is the only other to have a non-executive chairman. It’s likely that change was forced on Citi by Bair as the head of the FDIC, who also got the bank to downsize in a major way. Stumpf’s blindness to the disease of an overly-zealous sales culture suggests that the board and Sloan will be in denial about the magnitude of change required. House Financial Services Committee ranking member Maxine Waters has the same doubts. The Financial Times quotes her as saying:
Tim Sloan is also culpable in the recent scandal, serving in a central role in the chain of command that ought to have stopped this misconduct from happening.
Waters is also continuing to press for a breakup of the bank.
Elizabeth Warren isn’t satisfied either. She tweeted:
As I said: @WellsFargo CEO Stumpf should resign, return every nickel he made during the scam, & face DOJ/SEC investigation. He’s 1 for 3.
— Elizabeth Warren (@SenWarren) October 12, 2016
Stumpf gave up his severance package but the Financial Times estimates his retirement benefits plus direct and family trust Wells holdings as totaling $138 million; a Wall Street Journal expert puts it at $1210 million. However, the Journal noted:
However, the board could decide, depending on the investigation’s outcome, that Mr. Stumpf should relinquish more pay, the person added. This could include as much as $24 million of pension benefits, the person said.
Another Financial Times story argues that Wells Fargo’s tsuris “could cast cloud over peers.” A key point:
Wells’ board had tried to contain some of the damage by requiring Mr Stumpf to forfeit more than $40m of stock already awarded to him, while also taking back about $19m from Carrie Tolstedt, the former head of the retail business. In doing so, it joined a very small band of big companies to have responded to a reputational hit by requiring executives to forfeit unvested shares.
Analysts at Keefe, Bruyette & Woods said the clawbacks should be enough to “quell the outrage”, as they amounted to more than 20 times the fees inappropriately charged to customers during the period that regulators examined. That they were not, may send shivers down the spines of every senior executive at a big US bank.
It’s curious how this misses several points. A big issue was that the bank was far too slow to act to contain the escalating scandal. Second, from the perspective of some of the constituencies that have been harmed, most important whistleblowers who were fired, having Stumpf and Tolstedt merely suffer an inconvenient hit to stratospheric net worths is inadequate. As Elizabeth Warren keeps stressing, if a teller had taken money from the cash drawer, merely putting the money back, apologizing, and having a week of pay docked would never be seen as an adequate remedy. They’d go to jail. The elites are only dimly beginning to recognize that some members of their ranks need to suffer in a big way when they steal from customers or abuse employees. But so far, the members of the club appear unwilling to discipline their own members. If they persist, how long they can hang on to legitimacy and quell populist backlashes remains open to question.