On her way out the door, Janet Yellen administered a punishment to serial miscreant Wells Fargo that she’d threatened if they hadn’t cleaned up their act sufficiently, which at a minimum translates to putting on a really good show of being contrite. As we’ll describe, while it was a bit tougher than what financial regulators have seen fit to dole out since the bank-friendly Clinton Administration, and other banks were whinging as a result, it is lame even by not-all-that-remote historical standards.
The Fed is forcing Wells to find three new directors by April and one more by year end, following through on a threat made last July. That is a necessary but far from sufficient condition for effecting real change at the bank, which has the hallmarks of having created a toxic culture that will take a concerted effort to change. However, with a CEO who was promoted internally, Tim Sloan, there’s every reason to expect that all will happen are cosmetic changes, and Sloan’s conduct to date is consistent with that.
The Fed also took the unusual step of putting a hard balance sheet cap on Wells Fargo, and saying it stays in place until the Fed sees fit to lift it. That move appears to have created a wee frisson across the banking world, even though Wells Fargo claims will cost them an estimated $300 to $400 million a year, which is still a “cost of doing business” level punishment. And mind you, Wells Fargo has every incentive to play up how much they are supposedly losing.
Bloomberg’s Gadfly column questioned Wells Fargo’s claim that it would suffer financially, at least in the near term:
The Fed also took the unprecedented step of prohibiting Wells Fargo from growing any larger than its total asset size at the end of 2017, or $2 trillion, without clearance from the central bank. Ironically, this sanction actually provides an element of cover for the lender, which has found growth to be a challenge lately.
Readers may recall that the fake accounts scandal at Wells came to light in September 2016, when the bank announced it had entered into a settlement with the Consumer Finance Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles city attorney. The initial outrage stemmed from the puny fines relative to the scale of the fraud. The regulators look to have accepted the Wells Fargo point of view, that the total dollar amount stolen, via fees on unauthorized accounts being debited from deposits, was puny (at the time, estimated at $4 million tops). But the idea that the bank had created millions of phony accounts, potentially hurting customers’ credit score, and had stolen from hundreds of thousands of bank accounts, proved to be a lightening rod. It’s one thing for banks to have made an art form of dining customers for all sort of charges they didn’t realize they could incur. It’s another to practice embezzlement on an industrial scale. As we wrote when the scandal broke:
This was an astonishingly brazen, large-scale effort, clearly a systematic, institutionalized campaign. It is virtually impossible for senior executives not to have known what was going on. The big reason that Wells has managed to cultivate the myth that it is better managed than other large banks is that it is largely a traditional bank, as in it is not seriously involved in free-wheeling, high-risk, hard to manage investment banking activities.
But traditional banks, and above all retail banking operations, are extremely routinized. Customer-facing staff have virtually no discretion. For decades, bank branches have been operated as retail stores, with employees offering standard products. Similarly, the activities of call center staff are similarly highly circumscribed, set forth in clearly defined routines, which includes strict scripting for some interactions.
In other words, there is no way to defend the lack of punishment of executives in a fraud of this scale that extended over five years.
Yet Wells Fargo’s board was remarkably slow to act. I thought the CEO and Chairman John Stumpf would be turfed out within ten days. Even with two disastrous Congressional hearings and news of more frauds breaking, including illegally repossessing cars of active servicemembers and force placing auto insurance, which led to an estimated 20,000 wrongfull repossessions, it took over a month.
Even then, Wells Fargo’s board couldn’t bring itself to do the right thing, which was bring in an outsides who would be credible as a turnaround leader. Georgtown law professor Adam Levitin said via e-mail that Wells’ best move would have been to bring in Shiela Bair.
Instead, the board elevated Tim Sloan, who was apparently deemed to be remote enough from the scandals by virtue of not being in the reporting line of the retail operations. The wee problem with that logic is that it implies Sloan was either terrible at his job or he also knew full well what was afoot. He was the Chief Financial Officer from 2011 to 2014, during height of the fake accounts scandal. That meant among other things that he was giving Sarbanes-Oxley certifications as to the adequacy of Wells Fargo’s controls. If you buy the garbage barge that Wells Fargo has kept trying to sell, that the scandal was all the handiwork of evil lower level employees, you have to believe the controls were inadequate and therefore Sloan was giving false certifications. Or else the top brass knew and Sloan should be turfed out too.
Let us stress that the Congresscritters that called Wells Fargo a “criminal enterprise” were on the mark, yet as usual, the bank has gotten away with a wrist slap. The fake accounts scandal was neither the beginning nor the end of bad conduct by Wells Fargo.
As we have recounted, during the foreclosure abuse scandal, Wells Fargo had consistently taken a sanctimonious posture, pretending it wasn’t engaging in the same predatory behavior as other bank servicers. Yet among other things, it was caught out with having created a mortgage document fabrication manual, ruled to have engaged in “reprehensible,” systematic foreclosure abuses, and as whistleblowers told us, not even making a serious effort of investigation during the mandated Independent Foreclosure Review in 2012.
Since the fake accounts scandal broke, Wells ‘fessed up to having created even more phony accounts. Mind you, it had earlier claimed it had come clean. From CNN last August:
Wells Fargo has uncovered up to 1.4 million more fake accounts after digging deeper into the bank’s broken sales culture…
Wells Fargo now says it has found a total of up to 3.5 million potentially fake bank and credit card accounts, up from its earlier tally of approximately 2.1 million. In other words, there are two-thirds more fake accounts than previously realized.
The additional fake accounts were discovered by a previously announced analysis that went back to January 2009 and that further reviewed the original May 2011 to mid-2015 period.
About 190,000 accounts were slapped with unnecessary fees for these accounts, Wells Fargo said. That’s up from 130,000 previously.
Oh, and while we’re at it:
Wells Fargo also discovered a new problem: thousands of customers were also enrolled in online bill pay without their authorization. The review found 528,000 potentially unauthorized online bill pay enrollments.
It’s worth watching Elizabeth Warren grill CEO Sloan last September, when he been in place for almost a year. It’s obvious that as someone who was in a senior role when so much bad conduct was happening that he is far too vested in defending the status quo:
Notice he has the nerve to try to stand up to Warren when she clearly has the goods on him (at 7:35). All he does is put his hand in a buzz saw. 1
One bit (and we do mean bit) of good news is the wee spine stiffening on Wells Fargo isn’t likely to be reversed now that Jerome Powell is taking the helm as Fed chairman. Even though this is a comparatively mild move towards better governance, it is so out of keeping with the decades-long posture of deference that bank boards are gobsmacked. Mind you, they also have every incentive to play up this move as tough in order to deter the leash being tightened further. From the Wall Street Journal:
A letter Friday from departing Fed Chairwoman Janet Yellen to Sen. Elizabeth Warren (D., Mass.), showed that the central bank is thinking more broadly than just Wells Fargo. Ms. Yellen wrote that the Fed is raising expectations for boards of directors across the banking industry…
The letter cited guidance for boards the Fed proposed in August, which Mrs. Yellen wrote “marks the first time that the Federal Reserve has issued stand-alone expectations for boards of directors as distinct from management.”..
But banks shouldn’t necessarily think Mr. [Jerome] Powell will change course. As a Fed governor, he took a leading role in pushing the Fed to adopt the new regulatory guidance for board members.
And as to, “What could the authorities have done?” spare me. Warren is right that nothing will change until senior execs are tossed out, and by regulators, rather than by boards because the bad press can’t be tamped down.
In 1992, Salomon Brothers had been engaged in a Treasury bond market rigging scandal. Without going into the details, the investment bank had failed to curb a trader even after having been told in no uncertain terms to cut it out, allowing him to break the rules even after the Treasury had sent Salomon evidence that they had caught him out in a new version of cheating. The central bank, which runs bond auctions on behalf of the Treasury, found out about the continued defiance via a Wall Street Journal story. Salomon’s chairman/CEO, vice chairman, general counsel, and head government bond trader resigned days later. Salomon was such a large bond trader that those operations were arguably systemically important, yet the Fed wasn’t about to be cowed.
By contrast, Wells Fargo is largely a retail bank. They have vastly more stable operations that an old-style investment bank, which are much more “eat what you kill” environments, and entire profit centers can be poached. There is nothing special about being a big dog at Wells Fargo. There are plenty of former senior banking executives who could fill those roles. That is why the failure to turf out the CEO and get someone who was not part of the problem in is so inexcusable. Wells Fargo is not only where it needs to happen, it is where the authorities could have flexed their muscles with very little downside.
1 It was a nice touch that Warren didn’t bother making her hair look nice for this hearing. It was a subtle way to register her lack of respect for Sloan.