Assessing Wells Fargo

Tim Sloan: The CEO Replacing Wells Fargo’s John Stumpf

Excerpt:

Wells Fargo & Co.’s new chief executive has the right resume: 29 years at the bank, and none of them in its troubled retail unit.

Timothy J. Sloan rose through the commercial, corporate and investment banking side of a firm best known as a Main Street lender, helping with deals including the $15.4 billion crisis-era takeover of struggling Wachovia Corp. Now, he must show he can get a handle on the bank’s sprawling consumer business.

His tasks include fixing a reputation battered by revelations that staff signed customers up for as many as two million accounts without their knowledge to meet lofty sales goals. He will also have to navigate a raft of federal and state investigations, including from the Justice Department. ...

Mr. Sloan ... lives with his family in a Los Angeles suburb and often commutes to Wells Fargo’s San Francisco headquarters during the week. A graduate of the University of Michigan, he joined the bank in 1987 as a vice president with its loan adjustment group.

He worked his way up through jobs in units that made loans to big companies and handled real estate deals. He was named chief financial officer in 2011 and head of wholesale banking in 2014. That side of the business serves corporate customers’ borrowing needs globally, as well as activities like commercial real estate, treasury services, investment banking and insurance.

Comment: Quite the commute! Image source is Bloomberg.

Wells Fargo’s Textbook Case of Botched Crisis Management

Excerpt:

It was clear John Stumpf, chief executive of Wells Fargo & Co., was in trouble on Sept. 20, when senators from both parties castigated him over the bank’s sales practices. “It’s gutless leadership…you should be criminally investigated,” said Sen. Elizabeth Warren (D., Mass.) “This is fraud,” said Sen. Pat Toomey (R., Pa.).

The bank could have been better prepared. Summoned for hearings in Washington, Mr. Stumpf and other executives didn’t answer many questions from legislators—in public or private—about sales practices that had led the bank to agree to a $185 million fine and regulatory enforcement action.

Jon Tester (D., Mont.), said he went into the Senate banking hearing on Wells Fargo with an open mind but was left “pissed off” that the CEO didn’t answer some questions. The bank didn’t try mollifying the senator likely to be Mr. Stumpf’s most dangerous foe, Sen. Warren. “This is a crisis-management 101 mistake,” said an aide to Sen. Warren.

... Even before the hearings, Wells Fargo had been slow-footed in responding to outrage over employee behavior that included opening as many as 2 million unauthorized accounts without customer knowledge.

It misjudged the significance of firing 5,300 employees over five years for related bad behavior, failing to tell its own board of the number before regulators made it public. The botched response, a textbook example of how not to handle a crisis, reached a peak when Mr. Stumpf stepped down Wednesday after nearly 35 years at the bank and nine years as CEO. It was an ignominious end to a chief who had overseen Wells Fargo as it grew, at one point, to be the largest bank in the world by market value. 

At the root of Wells Fargo’s crisis-control debacle is an insular corporate culture, fostered by executives with decades of tenure, which left it ill-prepared for the tumult that followed its regulatory settlement, said several former Wells Fargo executives. Having passed through the financial crisis mostly unscathed, the bank’s brass was largely untested by crisis, these executives said.

Comment: I highlighted insular corporate culture above. This can be a problem in any organization, including, as I've seen, in churches. Note the stock decline since August 1st. We have multi-hundred - it hurts!

What's ahead? What’s Next for Wells Fargo?

Excerpt:

• Justice Department: Federal prosecutors in New York, California and North Carolina are looking into sales practices at Wells Fargo ...They have yet to decide if any case would be civil or criminal, or if there is a case.
• State inquiries: Connecticut Attorney General George Jepsen has opened an investigation of the bank, a spokeswoman said Thursday. She said the attorney general has “substantial concerns” about Wells Fargo’s actions and would examine whether state laws had been broken. Illinois Attorney General Lisa Madigan’s office has asked for a meeting with Wells Fargo, her office said late Wednesday . A spokeswoman said the office was concerned by reports that Wells had opened unauthorized accounts before 2011, since last month’s settlement went back only through that year. Florida Attorney General Pam Bondi’s office said last month it had reached out to both the Consumer Financial Protection Bureau and the bank. Other states are monitoring the matter and could take a higher-profile role in the future.
• Lawmakers: The House Financial Services Committee is conducting its own investigation. It plans to interview more Wells Fargo executives and is collecting more information from the bank and regulators about when the wrongdoing was discovered. Rep. Jeb Hensarling (R-Texas), the committee chairman, said there could be more hearings. The committee has asked for interviews with new CEO Timothy Sloan, Chief Financial Officer John Shrewsberry, former retail bank head Carrie Tolstedt and Chief Risk Officer Michael Loughlin. Democrats on the Senate Banking Committee have also asked the bank for more information, including state-by-state data on affected customers and how the bank might fix credit scores for harmed customers.
• Local governments: California, Illinois, Chicago, and Seattle, among others, have said they will curb their business relationships with Wells Fargo. The bank has said it is disappointed in those decisions, noting that its municipal relationships are separate from the retail bank.
• SEC: Democratic lawmakers asked the Securities and Exchange Commission to investigate whether the bank misled investors by not disclosing the sales problems sooner. The bank has said that the problems weren’t material.
• DOL: The Labor Department is conducting a review of the bank’s treatment of employees, including whether Wells Fargo skirted overtime rules. The move follows a letter from Democratic senators urging an investigation.
• Internal investigation: Wells Fargo’s board is also conducting its own inquiry about what went wrong, and the bank is reviewing all accounts back to 2009. (The settlement went back to 2011.) John Stumpf, who stepped down as CEO on Wednesday, was asked at the House hearing if the bank would go back further.
• Executive pay: The board already took back $41 million of Mr. Stumpf’s compensation, but he’s still eligible for about $120 million in total compensation earned over his career, according to an independent analysis conducted for The Journal. The board could choose to claw back more of his pay, according to a person familiar with the matter. It could also look to do so for other executives, the person added.
• Private lawsuits: Class-action lawyers have been busily recruiting both employees and investors who say they were wronged, and some lawsuits have already been filed.
• Shareholders: The CtW Investment Group has asked the bank for shareholders to be allowed to vote next spring on changes including two new board members. Shareholders have until mid November to submit other proposals for next year’s annual meeting.

Comment: Boiling caldron source. I would liken the years ahead to the song of the witches from MacBeth:

Double, double toil and trouble;
Fire burn and caldron bubble.
Fillet of a fenny snake,
In the caldron boil and bake;
Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder's fork and blind-worm's sting,
Lizard's leg and howlet's wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble.
Double, double toil and trouble;
Fire burn and caldron bubble.
Cool it with a baboon's blood,
Then the charm is firm and good.