There’s no crying in banking.
So let’s not shed any tears for Wells Fargo Bank, which last week got justifiably slapped down by Janet Yellen in one of her last decisions as chair of the powerful Federal Reserve, the country’s premier banking regulator.
Yellen put the country on notice that Wells Fargo, which secretly created and profited from millions of bogus consumer banking accounts, remains a rogue financial institution. The unprecedented Fed sanctions, which include capping the bank’s size while forcing directors to provide better and more oversight, is publicly pressuring Wells to accelerate efforts to clean up its act and regain the public’s trust and confidence.
It doesn’t stop there.
The Fed is also sending a powerful message to other U.S. banking giants: They must aggressively and quickly stomp out any sleazy management practices or the Fed will hold their bank directors directly responsible for any missteps.
California-based Wells Fargo, which has 49 Chicago-area locations and employs about 1,800 locally, insists it’s mending its ways. Financial watchdogs are skeptical of Wells Fargo’s sincerity and welcome the regulator’s increased vigilance.
“The Federal Reserve sanctions show the power and importance of government oversight in holding accountable companies that engage in abusive and harmful practices,” said Deborah Goldstein, executive vice president for the financial services watchdog Center for Responsible Lending, in an email to me.
When it comes to abusive and harmful business practices, Wells Fargo broke the bank.
Between 2009 and 2016, thousands of employees were under corporate pressure to hit lofty sales targets. To achieve those goals and win bonuses, some employees signed up more than 3.5 million customers for checking and credit card accounts without the customers knowing about it. Last year, the bank also said about 800,000 auto loan borrowers were improperly charged for auto insurance.
The bank’s longtime CEO, John Stumpf, exited the company under pressure, an estimated 5,200 employees were fired and millions of dollars in fines have been paid.
Until now, however, the company’s board of directors went relatively unscathed. Now, the Fed’s action slams Wells Fargo’s board for falling down on the job with its lax oversight of top management.
While the Fed did not openly call on Wells Fargo to dump any directors, the consent cease-and-desist order coincides with Wells’ plan to replace four of them — three by April and the other by year’s end. Wells’ 15-person board is being compelled to bolster its “governance and risk management processes” to the Fed’s satisfaction, according to the regulator’s statement.
Maybe the bank was gearing up to make some director changes. But I wonder if the regulator signaled it wanted some turnover at the board level and Wells got the message.
Until such improvements are made, Wells cannot grow beyond its current asset size of around $2 trillion. The nation’s third-largest bank told investment analysts after the Fed action was revealed that it will suffer an earnings hit between $300 and $400 million this year, about a 2 percent decline.
Wells also told investors that many of the changes being demanded by the Fed were underway. But it added, “our work is not yet complete,” according to talking points used during the investor presentation.
Obviously, the Fed got tired of waiting and decided it was time to flex some muscle.
Aside from putting the board on notice, the cease-and-desist order is expected to light a fire under Wells CEO Timothy Sloan and get him to change the culture more quickly than he’s been doing since taking over in late 2016.
Some wonder if Sloan, a longtime Wells veteran, has the will and managerial moxie to make the sweeping changes needed to clean house and resurrect the bank’s reputation. But he’s got one crucial ally in superinvestor Warren Buffett, whose company owns little over 9 percent of Wells.
Might the Fed’s action compel a very loyal Buffett to rethink his commitment? Sure, it could.
A San Francisco-based Wells spokesman declined to discuss the CEO’s status. He referred to the Friday investor presentation regarding the bank’s position on the Fed’s decree.
The leaders of the nation’s other banking powerhouses, including JP Morgan Chase, Bank of America and Citigroup, should take the Fed’s crackdown seriously. This turns up the heat on bank directors to become more engaged, to question top management and to be less of a rubber stamp or lapdog. In short, to do the job the shareholders demand.
By targeting Wells and its directors, the Fed is also stressing its independence at a time when President Donald Trump’s antipathy toward industry regulations is well-known (although he isn’t always a fan of the superlarge banks).
Jerome Powell, the new Fed chair, was sworn in Monday. In remarks, he stressed the regulator will be “efficient as well as effective” in regulating the U.S. banking business.
Wells Fargo is now his problem and it’s a whopper.
The time has come to fix it, for crying out loud.
Twitter @ReedTribBiz
