By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Wells Fargo is in the news again, for agreeing last week to pay $500 million to the Consumer Financial Protection Bureau, and $500 million to the Office of the Comptroller of the Currency (OCC), for abuses in its automobile lending and mortgage units. (For the most recent posts by Yves about Wells, see here, here, here, here, and here, specifically concerning the unnecessary auto insurance covered by this settlement).
More fines, more sound and fury, as reported by Bloomberg in :
The nation’s third-largest bank submitted to an unprecedented order Friday that would give the Office of the Comptroller of the Currency the right to remove some of the lender’s executives or board members. That comes on top of the penalties Wells Fargo will pay to settle U.S. probes into mistreatment of consumers, the largest sanction of a U.S. bank under President Donald Trump.
The OCC said it “reserves the right to take additional supervisory action, including imposing business restrictions and making changes to executive officers or members of the bank’s board of directors.” The agency could also veto potential executive candidates.
…Wells Fargo warned shareholders last week it would soon face a fine of that size, which it will book retroactively in the first quarter. The bank remains under a Federal Reserve penalty that bans growth in total assets.
Yet still no sign of criminal charges, for the bank or its executives, and as for jail time…. I don’t think so.
(See for OCC’s press release and for its order).
Context: $1 Billion Fine vs. $3.7 Billion Tax Cuts
Now, some context. As Vox reported on Friday, in a headline that summarises the crux of the matter,. the $1 billion in fines levied by the OCC and the CFFPB is roughly a quarter of the $3.7 billion tax cut the bank received this year.
Pity the Poor Shareholders
So, set against this background, what worries James Stewart of the New York Times most? The headline of his piece tells us where he’s going:
But with the new $1 billion penalty, which is expected to be announced as soon as Friday, even I have to wonder: Has Wells Fargo been punished enough?
After all, the bank’s bad management is gone. Whether they’ve paid adequately for their multiple transgressions is an open question — no one has gone to jail, or even faced criminal charges. But Wells Fargo shareholders have been battered, with the company’s stock down about 16 percent this year, while shares of banking rivals like JPMorgan and Bank of America have fared much better, both with slight gains.
Stewart buttresses his point with an expert opinion:
“People did this, not the bank,” said Charles M. Elson, a professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “The behavior was reprehensible and they should have paid the price. But putting the onus on the corporation is a double whammy for shareholders. They were harmed by the actions of management and now they’re paying again.” (As a shareholder himself, Mr. Elson has felt the pain.)
Query: Does Stewart have access to a corporate governance expert who isn’t a Wells shareholder?
Now, while ordinary bank shareholders indeed suffer any time Wells is punished (or do they– more on this below), it also hurts executives who have share-related pay. This I believe includes former bank executives– e.g., the ones responsible for the abuses– because they remain significant shareholders. As Stewart notes:
As for the individuals involved, many have paid a price. At the top, the board fired the former chief executive, John Stumpf, as well as Carrie Tolstedt, who led the community banking division responsible for the fake accounts. The bank clawed back $69 million from Mr. Stumpf and $67 million from Ms. Tolstedt (though both are still enormously wealthy — Mr. Stumpf left with deferred compensation and stock valued at over $130 million, even after the clawbacks. Ms. Tolstedt left with over $124 million before clawbacks).
While laying on additional fines that hurt the share price may not be the most efficient way to punish those executives, it is unfortunately the best we’re likely to see under the system as it stands, not the system as it should be.
I recall the good old days, when George W. Bush was president, and C-suite types from Adelphia, Enron, and WorldCom ended up in the dock. I would like to turn the clock back to those times in this regard, instead of being stuck where we are today. But we all can know the words to the Stones song.
One other point. On whether it’s time to call time on punishing Wells, I note that in December, Trump tweeted otherwise, as reported in another Bloomberg piece,
Frustration with Wells Fargo is bipartisan, as demonstrated by Trump’s December tweet. The president foreshadowed that fines and penalties against the bank could be “substantially increased.” Trump also signaled a warning to the broader financial industry that there might be more to come: he pledged to dial back regulations, but made clear that punishments would be severe for firms “caught cheating.” The statement followed a news article questioning whether the Consumer Financial Protection Bureau’s new leadership, picked by Trump, would drop an investigation into Wells Fargo.
Back to the ordinary shareholders. What did they think of the latest settlement? According to Bloomberg in :
Still, investors appeared relieved at the announcement, as shares advanced 1.8 percent to $52.44 at 11:10 a.m. in New York, the best performer in the 24-company KBW Bank Index. The settlement should remove one overhang from the shares, especially since the penalty isn’t as bad as some analysts had anticipated, Erika Najarian, an analyst at Bank of America Corp., in a note.