Through the financial crisis and beyond, Wells Fargo largely managed to dodge the embarrassing stories and public scorn that have swirled around some of its big-bank peers. That ended abruptly this month.
Federal regulators, announcing a $185 million settlement, said employees of the nation’s third-largest bank by assets secretly opened millions of accounts that customers may not have authorized. The regulators described “widespread illegal” practices they said went on for years, as front-line employees in branches faced pressure to meet sales goals and earn bonuses.
Fallout from the revelations continues:
▪ CEO John Stumpf has been called to testify Tuesday before the Senate Banking Committee, facing questions from Elizabeth Warren, the firebrand Wall Street critic who has called the bank’s actions “staggering fraud.” Later this month, he’ll also face the House Financial Services Committee.
▪ Federal prosecutors in Charlotte and San Francisco are leading an investigation of the bank, a source familiar with the matter told the Observer. The probe could result in civil or criminal charges.
▪ Critics, including Democrats on the Senate panel, say they want top executives held accountable. Some want the bank to “claw back” some of the compensation paid to Carrie Tolstedt, the 56-year-old retiring retail banking executive who was paid $9.1 million in salary, bonus and stock awards in 2015.
It’s a stunning reversal for a bank long seen as a stable, conservative Main Street lender, a homey alternative to Wall Street banks – an image embodied in its red-and-gold stagecoach logo. Those traits helped make it a prized stock for investors such as billionaire Warren Buffett, its biggest shareholder.
“Everybody thought this was the best-run, best-managed bank in the country,” said bank analyst Dick Bove. “And that image has been shattered.”
Wells Fargo did not admit or deny allegations in settlement documents. The bank has offered its regrets to customers and says it has already refunded $2.6 million in fees to affected people. It also said it fired 5,300 employees between January 2011 and March 2016 over improper practices.
Those and other actions haven’t stopped the drumbeat of criticism. In a report Friday, research firm Gimme Credit faulted Wells Fargo executives for “seeming to dump the blame on low-level employees” instead of “fully acknowledging the role the bank’s sales-driven culture played in fostering improper behavior.”
Undergirding that sales culture: an oft-repeated goal to sell an average of eight Wells Fargo products to each customer in a practice known as “cross-selling.”
The city of Los Angeles, which was part of the settlement announced this month, detailed Wells’ high pressure sales tactics in a 2015 lawsuit. Wells Fargo’s sales quotas were difficult for many bankers to meet without resorting to “abusive and fraudulent” tactics, the suit says.
This led bankers to engage in a practice called “gaming” – opening fee-generating accounts through “often unfair, fraudulent and unlawful means,” such as creating unwanted secondary accounts without permission, the suit says.
In a new lawsuit filed Friday in federal court, three Utah customers said the push to sell eight products to each customer drove employees to create the unauthorized accounts, Bloomberg reported.
Since the fine’s announcement, Wells Fargo’s stock price has fallen more than 8 percent, lopping more than $21 billion off the company’s total market value. The shares closed Friday at $45.43, near a 52-week low.
Stronger after the crisis
During the financial crisis, some banking giants such as Lehman Brothers and Bear Stearns disappeared. Many others, including Charlotte-based Bank of America and Goldman Sachs, took big hits to their reputations while racking up billions of dollars in fines, largely for mortgage-related issues.
San Francisco-based Wells Fargo, however, emerged from the crisis with a burnished name and a robust East Coast presence after buying Charlotte’s Wachovia in 2008. Wells Fargo now maintains its largest employment hub in Charlotte, with more than 23,000 workers.
As the largest U.S. mortgage lender, Wells Fargo certainly hasn’t been immune to criticism – particularly for making higher-interest subprime loans to customers during the housing boom and for its role in the nation’s foreclosure crisis. The bank racked up billions of dollars in penalties over Federal Housing Administration loans, botched foreclosures and mortgage-backed securities.
Still, executives touted Wells Fargo’s corporate values and business performance, while other banks struggled.
In a 2010 interview with a commission investigating the financial crisis, Stumpf criticized “weaknesses” in the culture at Wachovia, the company his bank had acquired. And he pointed to Wells’ culture and lending practices as the reasons it avoided some of the ills that doomed other banks.
Now it’s Stumpf’s turn to face lawmakers angry over bad banker behavior.
“We are prepared to provide the committee with information on this matter and to discuss steps we have taken to affirm our commitment to customers,” Wells Fargo said in a statement.
Raised on a farm
Stumpf, who turned 63 Thursday, has been with the bank since joining Minnesota-based predecessor Norwest in 1982.
He’s fond of telling folksy stories about growing up on a dairy farm with his 10 siblings, paying his way through college playing in a band called The Mason-Dixon Line and starting his banking career as a repo man. He became CEO in 2007 and added the chairman title in 2010.
He has long touted the bank’s ability to sell multiple products to its customers – and says that will continue.
“We are not abandoning cross-sell,” Stumpf told CNBC’s Jim Cramer last week as the firestorm over the bank’s sales practices intensified. “We love cross-sell.”
In recent years, the silver-haired exec has also been one of the industry’s top paid bankers. In 2015, he received $19.3 million in salary, bonus and stock awards.
Over his career, he has accumulated about 1.7 million shares of Wells common stock and stock units, worth about $77 million as of Friday, according to the bank’s latest proxy filing. He also has 3.8 million in options to buy company stock exercisable within 60 days.
Stumpf stands out in another way, as well: He’s the only CEO among the six biggest U.S. banks to sit on boards of other public companies, according to securities filings. Since 2010, he has been a director at Chevron, where he was awarded $375,737 in cash, stock and other compensation for 2015. Since 2010, he has been a director for retailer Target Corp., which awarded him $272,521 in cash and stock in 2015.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said it’s unusual today for the CEO of a large bank to sit on the boards of multiple public companies. Serving on boards for two large companies might require 190 hours a year at the very least for each board, he said.
“That’s huge,” Elson said. “That’s a lot of time.”
“I’m a little surprised that he (sits on) more than one board, particularly given the turbulence of the financial services industry,” Elson said.
Troubles not over
While Stumpf will look to dampen the outcry on Tuesday in Washington, the bogus account scandal could cause Wells lasting harm, analysts said.
“I think it’s going to take two years for this company to solve the internal problems that led to this situation,” said Bove, the analyst. “This bank needs a clean sweep of middle management and some executives.”
In a report, investment banking and research firm FBR & Co. said Wells Fargo likely lost the “special status” and “more positive brand image” it held among regulators.
Consumer advocacy group Public Citizen announced Friday it has filed a shareholder proposal urging Wells Fargo to study the idea of breaking itself up. Saying Wells Fargo is “too big to manage,” Public Citizen said the bank’s board should retain independent experts to explore whether the company would be worth more in parts. Similar breakup proposals at Bank of America, Citigroup and JPMorgan Chase & Co. have generated little shareholder support in recent years.
Tim Smith, a senior vice president at Walden Asset Management, which manages about 500,000 Wells Fargo shares for clients, said some of the bank’s investors have told him they believe the bank has a cultural problem.
“Shareowners are deeply concerned about this,” Smith said, who noted his firm’s clients include pension funds and religious groups who want their investments to match their social, environmental and ethical beliefs.
One of Walden’s clients, Needmor Fund, has submitted a proposal that calls for Wells Fargo’s chairman and chief executive roles to be held by separate people once Stumpf is no longer CEO.
Stumpf said on CNBC he doesn’t plan to step down over the unauthorized-accounts scandal.
“I think the best thing I could do right now,” he said, “is lead this company.”