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Wells Fargo is facing a tidal wave of bad news.
The bank has a mounting series of problems stemming from the news that since 2011 employees had improperly opened accounts for customers.
In addition to a settlement on Thursday, Wells has been hit with backlash over other things such as executive compensation and questions about its debt.
The crux of it all
The catalyst for all the bad news is the opening of fraudulent accounts on behalf of customers.
Starting in 2011, Wells Fargo employees opened 2 million bank and credit card accounts in customers’ names without their knowledge. The goal was to generate fees for the company and hit aggressive sales targets for employees.
After an investigation, the bank was accused of improperly opening accounts by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and the Los Angeles prosecutor. It settled on Thursday for $185 million.
In addition to the fine, 5,300 employees have been fired in connection with the improper openings – roughly 1% of Wells Fargo’s workforce.
Since the announcement of the settlement, Wells Fargo not only has had to deal with the financial fallout, but also with a public relations disaster.
On Monday, five US senators on the Senate banking committee wrote a letter to Richard Shelby, head of the committee, asking for an investigation and hearings to address the matter.
“The magnitude of this situation deserves a thorough and comprehensive review,” the letter said. “As members of the Senate committee of jurisdiction, we should undertake prompt action to fully investigate the cause, scope, and impact of this event, as well as understand and consider implementing any lessons learned.”
The hearing is set for September 20, and according to Isaac Boltansky, director of policy research at Compass Point, it will likely evoke memories of the 2013 London Whale hearing, where the bank’s top brass were dragged up in front of lawmakers.
“Our sense is that lawmaker questioning – particularly from Senators Brown (D-OH), Warren (D-MA), and Merkley (D-OR) – will focus on establishing a narrative that Wells Fargo is either ‘too big to manage’ or its management was willfully complicit in the fraud,” Boltansky said.
Democratic Sen. Elizabeth Warren, who signed the letter to Shelby, told CNN that Wells had committed a “staggering fraud.” Democratic presidential candidate Hillary Clinton commented on the settlement by Wells, calling the account openings “outrageous behavior.”
Moody’s, a credit rating agency, issued a warning that the settlement may have a negative effect on Wells’ debt because of image concerns and called the incident “highly disturbing.”
“We do expect some immediate damage to Wells Fargo’s reputation from this embarrassing episode,” the Moody’s report said.
On Tuesday, Treasury Secretary Jack Lew told CNBC that from what he had seen, Wells Fargo had participated in “bad behavior,” and that the accusations showed bank regulation should not be rolled back.
“What I can tell you is there’s a lot of talk in Washington these days about rolling back Dodd-Frank, about rolling back the law, changing the law that created the agency that uncovered and took action against this,” he said. “This ought to be a moment when people stop and remember how dangerous the system is when you don’t have the proper protections in place.”
Wells Fargo’s response
In addition to the settlement, Wells announced that it was eliminating its sales goals for retail employees. The thinking is that targeted goals for opening accounts and generating fees led employees to cut corners and open accounts improperly.
“We are eliminating product sales goals because we want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers,” CEO John Stumpf said in a statement about the change.
- Reuters/ John Adkisson
Despite the shift, Stumpf said in an interview with The Wall Street Journal on Tuesday that there “was no incentive to do bad things” at Wells and laid the blame on the employees rather than the culture of the firm.
Speaking at Barclays’ Global Financial Services Conference, Wells Fargo CFO John Shrewsberry said the fraudulent accounts were not opened in order to generate revenue for the bank. Instead, a few employees opened them to boost their performance.
“It was really more at the lower end of the performance scale, where people apparently were making bad choices to hang on to their job,” Shrewsberry said.
Also drawing the ire of lawmakers and pundits is the $125 million retirement payment going to Wells Fargo executive Carrie Tolstedt upon her retirement at the end of the year.
- Sarah Rice/Getty
Tolstedt heads up the community banking division that in part oversees the retail banking and credit card operations part of the company and which was responsible for the improperly opened accounts.
Tolstedt is scheduled to step down at the end of the year and receive roughly $125 million in stock and other compensation from the bank.
The retirement is not a result of the findings, according to Wells Fargo; Tolstedt announced the move in July. Additionally, these compensation packages are usually set well in advance.
Still, in a time of public relations struggles, it’s another headache for the bank.
Wells Fargo’s stock has taken a bit of a hit since the news, dropping by roughly $3 per share in the past week – just shy of 6%.
The Senate investigation still looms, and the public relations mess will nag the company, but outside of the settlement cost it is unclear what impact the past week will have on Wells Fargo.
So far it hasn’t mattered too much – at least according to the company.
Shrewsberry said at the Barclays’ conference that there has been little effect so far on customer behavior at Wells, but only time will tell if that remains the case.