Wells Fargo Still Searching for Stability

It was not all that long ago that Wells Fargo was the most respected bank in the United States, perhaps even in the world. It had avoided the worst excesses of the real estate bubble despite being heavily dependent on mortgage lending. It didn’t hurt that Warren Buffett was (and still is) its largest shareholder and its returns on shareholder equity were higher than any other large bank.

Then last year revelations surfaced that the bank’s incentive programs for store employees had led them to create fake accounts for customers in order to create an illusion of greater cross-selling than was actually taking place. The bank had focused for years on an operation focused on cross-selling products to consumers and businesses. If someone opened a checking account, then the branch staff would focus on selling credit cards, mortgages, savings accounts and other products to the customer. That approach made sense in that it helped foster long term relationships and made more efficient use of marketing relationships.

The problem was that when Wells Fargo incented branch employees on reaching cross-selling goals, they did not include enough compliance oversight to ensure the system was not being cheated. That resulted in a multi-year practice at some branches of opening accounts without the permission of customers just to meet cross-selling goals. After seeming tone deaf to the problem, CEO John Stumpf lost his job and the bank paid $185 million to the CFPB. Stumpf had also been Chairman of the Board. While Timothy Sloan replaced Stumpf as CEO of the company, the job of Chairman went to the lead independent director at the time, Stephen Sanger. Sanger was previously the CEO of General Mills.

While last year and the changes that resulted from it were painful, it seemed that the bank was ready to move forward. Now, further controversy has brewed as a result of revelations that the bank charged some of its customers for car insurance that they neither needed or wanted. As is common for auto lending, Wells Fargo required those it made loans, to have collision insurance to protect it from losses. A clause in the agreement allowed Wells Fargo to charge for auto insurance if the borrower did not have their own. But, as many as 800,000 borrowers who did have auto insurance were charged for it anyway according to the New York Times. Worse – about 25,000 of those borrowers ultimately had their car repossessed.

Senator Elizabeth Warren asked Federal Reserve Chairee Janet Yellen why the entire Board of Wells Fargo was not removed by the Federal Reserve after many of these failures had come to light. While stopping short of doing that, Yellen did confirm that the Federal Reserve does indeed have the authority to do so.

It seems that Wells Fargo is now ready to act on its own. According to the Wall Street Journal, it is likely that the company will move to replace Sanger as the Chair of the Board by Labor Day and be replaced by Vice Chair Elizabeth Duke. Duke is a former member of the Board of Governors for the Federal Reserve System.

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