Since Wells Fargo’s woes mount, its board Could be on the firing line

Since Wells Fargo’s woes mount, its board may be on the firing line

August 9, 2017

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A sign is posted in front of a Wells Fargo bank in Oakland, California.

Continuing wrongdoing at Wells Fargo could claim its board of directors, according to new research.

While such steps have a “checkered history,” and authorities might be wary, they’ve been able to eliminate supervisors or entire boards in “particularly egregious cases,” in the past, analysts at S&P Global Market Intelligence wrote, and such a step may resonate now, “particularly considering the current rise of populist anger.”

The woes at Wells Fargo

WFC, +0.32%

  first came to light last year, when regulators led by the Consumer Financial Protection Bureau fined the bank $185 million for improperly opening roughly 2 million bank and credit card balances without customers’ knowledge or approval.

During the course of the regulators’ investigation, roughly 5,300 Wells employees were fired, and about a month after the revelation, Chairman and CEO John Stumpf resigned and was forced to forfeit millions of dollars in compensation.

Also read: Wells Fargo CEO’s $41 million ranks only third among executive-pay clawbacks, forfeitures

And the hits just keep coming.

Last month, the New York Times first broke the news that Wells had charged hundreds of thousands of clients for auto insurance they didn’t request or need. Because that extra coverage cost more, thousands of customers had overdrawn accounts, bank fees, dinged credit scores, or even defaults that resulted in car repossessions.

And just days later, the bank notified the Securities and Exchange Commission that the number of unauthorized bank accounts it had created might be much higher than previously reported, sending shares tumbling.

In light of the insurance difficulties, The Wall Street Journal reported that the Office of the Comptroller of the Currency, one of Wells’ regulators, was considering taking additional action against the bank.

And New York Attorney General Eric Schneiderman subpoenaed Oliver Wyman, a consultant engaged by Wells to determine problematic practices, such as the auto insurance charges.

Even before news of the auto insurance charges broke, Massachusetts Senator Elizabeth Warren was calling for the removal of Wells’ board. “The Federal Reserve must hold the Wells Fargo Board members accountable for their risk-management failures,” Warren wrote to Fed Chairwoman Janet Yellen.

Yellen later confirmed that the central bank does have the legal authority to take such a step.

Read: Yellen says she could oust Wells Fargo directors

S&P Global Market Intelligence notes that authorities would likely rely on a federal law called Section 1818, which allows for removal of a banker or officer if that individual compromises the safety and soundness of the institution. The bogus accounts scandal met that test, regulators said.

And there is precedent for this step. In 1984, when Continental Illinois failed, its bailout strategy included removal of the business’s top management and board of directors, S&P Global Market Intelligence wrote.

But Continental Illinois was unable to function on its own and had to be taken over by the government, and Wells, though tarnished, isn’t quite there yet. Its stock is down 4.7% for the year to date, compared to a 5.6% profit for the KBW Bank Index

BKX, +0.16%


Nevertheless, as David Long, a Raymond James analyst, wrote on Tuesday, Wells’ predicament is “getting worse before it gets better.” Long reiterated his underperform evaluation, writing that headline risk “will make it even harder for the bank to keep customers and workers, let alone attract new clients and employees, in our view. As a result, we are reducing our 2018 EPS estimate, and think negative headlines will continue to weigh on the stock and its comparative valuation.”

And just Tuesday, the New York Times reported that the San Francisco Fed, that’s the region in which Wells is headquartered, was exploring the bank for not refunding so-called guaranteed auto protection insurance money to clients who paid off car loans early. Tens of thousands of customers might have been affected, the Times said.

In April, shareholders repeatedly interrupted the bank’s yearly meeting, and most members of the board could maintain their seats with only meager margins.

In an email, a spokesman for the bank told MarketWatch, “Wells Fargo’s board and management team have taken many actions in response to its retail sales practices issues, such as changes in senior leadership, executive responsibility actions and numerous actions to make sure we make things right with our clients and other stakeholders. That work continues and remains a core part of our efforts to construct a better Wells Fargo for the future.”

Read: Housing crisis has led to breakdown of the social order, author says

After the first car insurance revelations, Warren wrote again to the Fed, again urging Yellen to eliminate Wells’ board. “Fines alone will never do the job,” she said.

“Given an uneven history, politicians agitating for change at Wells Fargo may have a difficult time convincing regulators to act. However, if scandals continue to pile up and public outrage accumulates further, authorities may see an chance to quell populist rage that spawned ‘Audit the Fed’ and Occupy Wall Street movements,” S&P Global Market Intelligence wrote.

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