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

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

Ongoing wrongdoing in Wells Fargo could claim its board of directors, according to new research.

While such measures have a “checkered history,” and authorities might be wary, they’ve been able to remove managers or entire boards in “particularly egregious cases,” in the past, analysts in S&P Global Market Intelligence composed, and such a step may revolve today, “especially considering the recent 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 accounts without customers’ knowledge or approval.

During the course of their 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 did not request or need. Because that extra coverage cost more, thousands of customers had overdrawn accounts, bank fees, dinged credit scores, or even defaults that led to car repossessions.

And just days later, the lender notified the Securities and Exchange Commission that the amount of unauthorized bank accounts it had generated could be much higher than previously reported, sending stocks.

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

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

Before news of the car 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 measure.

Also 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, allowing for removal of a banker or officer if that person 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 needed 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 so far, compared to a 5.6% gain to the KBW Bank Index

BKX, +0.16%


Still, 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 maintain customers and workers, let alone attract new clients and employees, in our opinion. As a result, we are reducing our 2018 EPS estimate, and think negative headlines will continue to weigh on the stock and its relative valuation.”

And only Tuesday, the New York Times reported that the San Francisco Fed, that’s the area in which Wells is headquartered, was exploring the bank for not refunding so-called guaranteed auto protection insurance money to clients who paid off auto 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 keep 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 own retail sales practices issues, including 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 component of our efforts to build a better Wells Fargo for the future.”

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

After the first auto insurance revelations, Warren wrote again to the Fed, again advocating Yellen to remove Wells’ board. “Fines alone will not do the job,” she said.

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

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