The Journal. - Why Wells Fargo Is Still Trying to Fix Itself

Episode Date: September 19, 2023

A former Wells Fargo executive was recently sentenced for her role in the bank's 2016 fake account scandal. WSJ's Ben Eisen explains why that sentencing isn't the end of this story for Wells Fargo as the bank has struggled to overhaul the way it manages risks, even seven years later. Further Reading: -Former Wells Fargo Executive Avoids Prison Time in Fake-Accounts Scandal  -Wells Fargo Is Still in Fix-It Mode  Further Listening: -Wells Fargo and the Fake-Account Fallout  -The War Inside Goldman Sachs  Learn more about your ad choices. Visit megaphone.fm/adchoices

It was 2016, and the bank Wells Fargo was in a lot of trouble. Wells Fargo's fake account scandal has done a real number on the bank's reputation. This is truly outrageous. Thousands of Wells Fargo employees at bank branches across the country opened millions of illegal accounts. Employees of the bank were caught opening millions of fake accounts in their customers' names. The Wells Fargo fake account scandal is bigger than originally thought. That's my question about Wells Fargo. How far up the line did this go? Some former employees say they were pressured to sell account add-ons to customers to meet what they say were unattainable sales goals.

The story rocked the banking world. Here's our colleague Ben Eisen. The thing about this scandal is it kind of revealed a sort of rot at the core of the bank. I think there was something bad going on inside this bank for a very long period of time. And last week, one executive was sentenced for her role in the fake account scandal. She was the only person from Wells Fargo to face a criminal penalty. But that isn't the end of the story for Wells Fargo, because the bank still hasn't recovered. I think the most interesting thing about the Wells Fargo scandal is just how long it's lasted.

This was a scandal that broke out into the open in 2016. And now here we are almost exactly seven years later, and the bank is kind of still in this place of trying to fix all the problems that were identified. It's just gone on for a tremendous amount of time. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, September 19th. Coming up on the show, why Wells Fargo just can't bounce back from a seven-year-old scandal. Need a great reason to get up in the morning?

Well, what about two? Right now, get a small, organic Fairtrade coffee and a tasty bacon and egg or breakfast sandwich for only $5 at A&W's in Ontario. For decades, Wells Fargo was seen as a low-risk bank. In the 2008 financial crisis, it was left relatively unscathed. Wells Fargo was for a very long time seen as this folksy bank that had this great reputation. It did well.

It was profitable. When the financial crisis happened, it really didn't get into as much trouble as everybody else did. And it kind of came out the other side in this place that was seen to be very healthy. And it was like boring banking in the best possible way, I think, is how a lot of people would have looked at it.

Obviously that didn't last. Right. Folksy, I don't think that was a word that I associated with banks before, but I can see what you mean. I mean, it was the bank with the corner bank branches and it had a big consumer presence. So it was making your mortgage and it was making your auto loan

and it did kind of all of those things that you associate with bread and butter consumer banking. And how big was Wells Fargo? It was one of the biggest banks in the country. For a period of time, it was the biggest bank by market capitalization. So bigger than JP Morgan, bigger than Bank of America, which right now are, you know, far and away the two biggest. It was sort of neck and neck with them not that long ago. Then in 2013, the Los Angeles Times reported

that Wells Fargo employees were fired for opening up fake accounts for their customers. But it wasn't until three years later, when regulators stepped in, that the scale of the problem really emerged. The thing that really broke this out into the open was a penalty imposed by some regulators. It was actually just a fine of $185 million that was imposed.

But, you know, along with that was the exposure of this revelation that the bank had created all these phony accounts, basically taking, you know, the information of people that were already customers at the bank and opening accounts in their name without their permission. Why did these employees do that? Why make these fake accounts? The bank had these goals in place for these employees that they had to basically cross-sell customers.

And they sort of saw it as a sign of customer loyalty and stickiness of these banking relationships that they had. Its former CEO at one point said that he had a goal of each customer having eight different banking products. And he was asked why, and he said, because eight rhymes with great. Wow. But a lot of that was built on the idea

that these low-level employees that worked in the branches or did jobs for which they honestly weren't paid that much, they had to go and do these very aggressive salesy things. And in some cases, to meet those goals, they opened fake accounts. When you say fake account, what does that mean? When you say fake account, what does that mean? Say I have a bank account there, and you're the employee and you need to meet your sales goals of opening a certain number of accounts,

you might go and open up another account for me, and there's no money in it, there's no transactions coming out of it, there's not actually a loss to me, at least in a lot of cases, but you've violated my privacy and you've done something without my permission and I've trusted you to hold my money. And so, you know, understandably, I would feel like, oh, my God, what are you doing?

More than 5,000 Wells Fargo employees were fired for their roles in the scandal. By the fall of 2016, then-CEO John Stumpf was testifying to Congress. I am deeply sorry that we failed to fulfill on our responsibility to our customers, to our team members, and to the American public. Here he is being questioned by Senator Elizabeth Warren. Have you fired a single senior executive? And by that, I don't mean a regional manager or branch manager. I'm asking about the people who actually led your community banking division or your compliance division. We've made a change in our regional, to lead our regional bank.

I just said, I'm not asking about regional managers. I'm not asking about branch managers. I'm asking if you have fired senior management. And when the CEO went before Congress, he did not come off well. He was sort of widely panned for his performance there. Elizabeth Warren dragged, dragged Stumpf in front of the Senate and tore him a new stumpful. He didn't really have that much information or answer questions all that well. He ended up sort of coming off as aloof. The discovery of the fake accounts was just the beginning.

Once regulators started examining the bank's books, they found other problems. And that's where things really went downhill. This morning, another scandal is rocking Wells Fargo. The United States CFPB has ordered Wells Fargo to pay $3.7 billion. To settle a number of violations, including charging illegal fees and interest on auto loans and mortgages, and incorrectly taking overdraft fees. Once everyone kind of took a look under the hood of the bank,

there were a lot of problems that came to light. It would be misapplied fees or wrongfully charged fees or like commercial bankers wrongly altering information for their customers. This bank's reputation was already in tatters and each incremental thing that came out sort of reinforced this point that this bank just was not managing itself very well. So the fake accounts essentially were kind of like the first domino, and then everything started to fall once regulators came in and took a closer look.

Exactly, yeah. The consequences for individual executives and the bank as a whole came quickly. Stumpf, the CEO, resigned, and he was banned from the banking industry for life. He also paid $20 million to settle charges. Another executive, Carrie Tolstead, was criminally charged and pleaded guilty earlier this year. She ran the retail arm of the bank, where many of the fake accounts originated. Last week, Tolstead was sentenced to three years probation, six months of home confinement, and 120 hours of community service. She was also fined $100,000. Wells Fargo also paid $3 billion in 2020

to settle investigations with the Justice Department and the SEC. And on top of all of that, the government put explicit restrictions around Wells Fargo's growth. After a culture of grow at all costs, this was a 180 turn for the bank. The most serious penalty that happened was the Federal Reserve basically said, look, you've had so many problems, you can't manage your risk and you can't put adequate governance in place. You can't grow as a bank until you can. So it really kind of kneecapped the bank, like really limited what they could do as a company. Yeah, exactly.

When you're a company, you're always thinking, grow, grow, grow, right? Get as big as you can. This is like, try hard not to grow. That's the challenge. Wells Fargo has been stumped by that challenge for seven years.

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becoming the hero of your own night unapologetically full flavored cocktails with a 13 percent punch seagram 13 dare to make your own luck must be legal drinking age please enjoy responsibly available at the lcbo In 2018, federal regulators decided that Wells Fargo couldn't manage its own risk. So they placed what's called an asset cap on the bank. It meant that Wells Fargo was literally forbidden from getting bigger than it was at the end of 2017. For example, the bank had to limit its loans. So banks are in the business of making loans. That's one of the main things that they do.

You make a loan, you put it on your balance sheet, that grows your asset base. But if you're capped in how much in assets you have, you have to pick and choose what loans you make. Or if you make one loan, you can make another loan. That is sort of the balancing task that they had to have. This was unprecedented. And if Wells Fargo ever wanted to get rid of that cap, it needed to prove to regulators that it could manage its risks better than it had.

Meaning, Wells Fargo needed to do a much better job at keeping people's money and information safe and flagging problems when they came up. At first, the bank's leadership thought this work wouldn't take long. At one point, after this ASICAP was put in place, the CEO at the time said he thought it would be removed in a couple months. There wasn't quite this recognition of how deep of a fix was required to get everything done. But it quickly became clear that the process would be much more complicated. Like, this is like a real kind of overhaul of the entire bank.

The regulators, when they say they want you to put adequate risk management and controls in place, like, they mean like turn the bank inside out and kind of build something new from the inside. And when you talk about building something new or overhauling, what kinds of things does the bank need to do to improve? So over the course of this period of its scandals, it got a lot of different penalties. So there are a lot of specific things that need to be fixed. Like thinking back to all of those problems,

like if you misapply fees for auto loans, you have to fix that, then you have to remediate the customers. Like any bank, Wells Fargo has controls to root out fraud and tamp down on risk. But even today, it hasn't updated them to the standards regulators or even Wells Fargo itself wants. So that's what Wells Fargo has been working on. Every day, employees gather in workshops. They discuss the best way to, say, deal with small things like late fees or big things like how to handle a foreclosure. Like if you think about all the thousands of different things that a bank does,

like it can cash your check, it can make you a loan, it can trade securities for you. Each of those tasks has all sorts of risks associated with those tasks. You basically have to make sure that every person in the bank has controls in place to make sure that they are preventing the problem. So maybe there's a pop-up on your screen that says, check ID before you cash the check. And so the teller can ask that. You have to do that, but then think about multiplying it across all the various things that a bank does. Wells Fargo's chief operating officer, Scott Powell, said that the bank is always talking about how it can make its programs better and support employees. He added that there

is nothing unique about the timeline. What's at stake for Wells Fargo? Everything. Everything's at stake in like its efforts to get its processes in order. The CEO said at a conference a few months ago that until we finish our work, we're still at risk. And I think that's kind of the MO that they've had over at least the last couple of years. Like, we need to get it done or else, like, our regulators have shown what they can do and they might take even more drastic or unprecedented action. Actions like breaking the bank up. At an event in January, the comptroller of the currency, which regulates Wells Fargo, said that banks that can't manage their risks may need to break up. Michael Hsu, the acting head of that office, didn't name

Wells Fargo, but it was widely seen as a focus of his remarks. Here's Hsu. The most effective and efficient way to successfully fix issues at a too-big-to-manage bank is to simplify it by divesting businesses, curtailing operations, and reducing complexity. In which he said, maybe we'll have to break them up or force them to shrink. And he sort of laid out this framework where there are escalating penalties for banks that can't do this right. And he wasn't talking specifically about Wells Fargo, but he wasn't not talking about Wells Fargo. Like, this is sort of the environment in which the bank is operating right now.

Wells Fargo is still profitable and the fourth biggest bank in the country. But since the scandal, its revenue has flatlined and its stock price has dipped. its stock price has dipped. So it can be easy for people to think about banking as Wall Street's problem. Why does this story matter for everyday consumers? This was a scandal where everyone kind of immediately knew what was going on. They could understand it. Wells Fargo is this bank it has tens of millions of customers around the country like if you don't have a wells fargo account you probably know someone who does and the thing that was happening was just like it just resonated with people oh my god i deposit my money in this bank i trust them they're an institution that's like you know i trust them. They're an institution that's like, you know, I trust them enough to keep my life savings there.

And look what they're doing. Like, let's stop and think for a minute about like what you did here and just how fundamentally you've sort of betrayed the trust of the people who trust you. That's all for today, Tuesday, September 19th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.