As we said more than a year ago, Wells Fargo needed to take far-reaching, fundamental, concrete, unexpected and painful actions to fix the management, systems and controls failures that gave rise to their decade-long egregious misconduct. If not, we said, the bank risked being punished for all the unpunished sins of Wall Street for causing the 2008 financial crash, getting bailed out with no accountability and continuing to pocket bonuses. Our proposed title for the Op Ed was “Wells Fargo’s Unique Opportunity,” but American Banker entitled it “Here’s How Wells Fargo Proves It’s Not a Wall Street Villain.” No guarantee it would have worked, but we now know the half-measures, PR actions and predictable moves didn’t work either.
Late last Friday, the Fed announced unprecedented sanctions against Wells Fargo for its multi-year, widespread consumer abuses and egregious compliance, risk, legal, management reporting and board oversight failures. In addition to Wells replacing four more members of its Board of Directors, the Fed limited the bank’s growth until it demonstrates significant, concrete governance, risk management and controls improvements, including, in particular, strengthening the effectiveness of oversight by its Board.
The cease and desist order also detailed numerous specific actions that Wells must take under very tight timelines. Effectively, Wells, its management and Board have been put on probation and the Fed is going to be a very aggressive probation officer.
But that’s not all the Fed did to make sure the Board members, in particular, received the message. It also required each Director to sign the fourteen-page cease and desist order and, further “emphasizing the need for improved director oversight of the firm, the [Fed] sent letters to each current Wells Fargo board member confirming that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations.” Remarkably, the Fed also sent individual letters to the former Chairman and CEO Stumpf and former lead independent director Sanger “stating that their performance in those roles…did not meet the Federal Reserve’s expectations.”
These actions are a stinging rebuke, which may well have been avoidable. The Fed did not act for almost a year and a half after the first scandal broke in September 2016. While making its views known, it nonetheless watched and waited for Wells and its Board to take the appropriate comprehensive action and apparently only acted when it was clear that management and the Board still didn’t get the seriousness of the failures and ongoing deficiencies. This was confirmed by their actions and statements after the shareholders’ votes at the annual meeting last April. Likely due to the actions they did take, among other reasons, “executives had convinced themselves last year that they were out of the woods,” as The New York Times reported. However, as we have emphasized, Wells Fargo was going to have to do a lot more than they wanted given the gravity and pervasiveness of their violations and failures.
Finally, those trying to minimize these actions as driven by former Chair Janet Yellen or due to political pressure simply don’t understand the Fed.
First, longtime career professionals at the Fed were in charge of these actions and they likely couldn’t care less about political pressure, real, perceived or trumpeted. We have little doubt the Fed was hoping and expecting Wells to take the appropriate significant actions and obviate the need for the Fed to act (maybe other than regarding Stumpf and Sanger).
Second, new Fed Chair Jay Powell was the lead Governor for the negotiations with Wells Fargo on these actions and the Fed vote was unanimous. Anyone thinking Jay Powell as Fed Chair is going to tolerate or turn a blind eye to outrageous, repeated customer abuses and wholesale breakdowns in management, risk and compliance doesn’t know Jay Powell. Every bank executive officer and director should carefully read a speech entitled “The Role of Boards at Large Financial Firms” that he delivered August 30, 2017, where he said:
The message sent by Powell last August and by the Fed in the actions against Wells Fargo could not be clearer and banks’ management and directors better get the message or they too will pay the price. Frankly, they would be wise to take up Matt Levine’s suggestion in Bloomberg View:
“I hope Wells Fargo will have framed and hang [the Fed’s letter to the Directors] in its Boardroom…. If I ran Goldman Sachs or JPMorgan, I’d frame it and hang it in my boardroom. It focuses the mind!” (Emphasis in original)
THAT is the point for banks and directors across America. For Wells Fargo, it has been given a very limited time to take the concrete actions it should have taken more than a year ago.
