There was no reason to believe that John Stumpf’s appearance on Capitol Hill yesterday (Sept. 20) would be anything but grueling.
There were those few tiny details of the ongoing and egregious creation of fake consumer accounts that (we’ve learned) went on for years at Wells Fargo. Everyone’s initial assumption upon hearing the news of the fine and the escapades of 5,300 employees was that this had gone unnoticed by the bank over the period of time that it had happened. In actuality, not only had it been a pervasive problem for years that employees were fired over, but it persisted. And Carrie Tolstedt, someone who had been consistently touted by banking publications as one of the “most powerful women in banking,” had overseen the operation the entire time and pulled down $124 million in the process.
Not to mention the fact that the board, whose chairman is none other than Mr. Stumpf himself, and investors had been kept in the dark about the investigation and the fine.
But there’s grueling, and then, there’s humiliating.
Being publicly called “gutless” — before being told that you should be fired and forced to return your last couple of years of salary — was just the warm-up act from a certain senator from Massachusetts that got the Wells Fargo party started yesterday. Although Sen. Elizabeth Warren (D-MA), as per usual, had the most colorful collection of criticisms, she was far from the only wildly dissatisfied voice on the Senate Banking Committee questioning Stumpf. It was a display of bipartisan disgust and animosity over Stumpf’s leadership and the bank culture and business practices overall.
But for all the color — and of that there was plenty — the day still ended on an inconclusive note. Stumpf said he was sorry — a lot. But whether he or Tolstedt will see any of their compensation clawed back or cut remains an open question, as does whether or not Wells will waive its arbitration clause with its customers and open itself up for a class-action suit. But the biggest unanswered question of the day remains Warren Buffett and what the Oracle of Omaha will do with Berkshire’s 9.5 percent stake in Wells Fargo. The speculation is swirling, and if its current direction is true, then the wrath of the U.S. Senate (and House next week) is John Stumpf’s second-biggest problem right now.
The Senate is Not Amused (Nor Should It Be)
“You should resign. You should give back the money you took while this scam was going on, and you should be criminally investigated,” Sen. Warren told Stumpf, adding that the only way that banks will change their behavior is if bank CEOs serve jail time.
And though she was direct, she wasn’t alone. Sen. Jeff Merkley (D-OR) also called for Stumpf’s resignation, right before calling for the SEC to join the party and investigate on the grounds that the bank possibly violated internal control provisions of the Sarbanes-Oxley Act by failing to stop the “widespread fraud.”
Stumpf apologized: “I accept full responsibility for all unethical sales practices.”
He later added: “I apologize to all of the American people and our customers, and I will make it right.”
Warren, however, wanted specific answers as to how he was going to make it right.
“Have you returned one nickel of the money that you earned while this scandal was going on? Have you fired any senior management, the people who actually oversaw this fraud?” she asked, noting that it seemed the bank had instead fired low-level employees after pressuring them into the illegal practices in the first place.
“Your definition of accountability is to push this on your low-level employees. This is gutless leadership.”
And while Warren is a known crusader in these matters, even the Republicans on the committee had rather harsh words for Stumpf.
“Why isn’t this crystal-clear proof that an entity as big as Wells is not only too big to fail but it’s too big to manage and too big to regulate?” Sen. David Vitter (R-LA) asked.
Vitter noted that there was something very wrong in a process where the bank started noticing irregularities as early as 2013 and was unable or unwilling to engage in solving the problem.
Sen. Richard Shelby (R-AL), on the other hand, was curious as to how the bank could claim to be taking responsibility when Tolstedt is reportedly retiring with over $120 million in compensation — despite the fact that her division was the locus of the fraud.
“Explain to the public: What does accountability look like when an executive departs with millions of dollars?” asked Shelby, the committee’s chairman.
Stumpf actively defended Tolstedt during the hearing and her role in working to discover and mediate the fraudulent account situation.
Stumpf also repeatedly reiterated that both his fate and Tolstedt’s will ultimately be decided by Wells Fargo’s board. A response that, again, failed to impress.
“You keep saying, ‘the board, the board,’” Warren said. “You describe them like they are strangers you met in a dark alley. Mr. Stumpf, you are the chairman of the board.”
The Buffett Question
What Stumpf’s board decides to do likely very much hinges on what the bank’s best-known investor does next. Thus far, Warren Buffett has been mostly silent on the issue — leading many to speculate what he knew when he drastically upped his stake in the firm over the summer.
The indications and rumors today — care of respected Wall Street analyst Dick Bove —are that Buffet will be saying bye-bye to Wells. His chief piece of evidence? Buffett’s investing deputy, Todd Combs, announced he was joining the JPMorgan board while Stumpf was getting grilled on the Hill.
“During these hearings, it was published that Warren Buffett is placing one of his key lieutenants on the board on JPMorgan, even though his companies do not own stock in that bank. He is clearly walking away from Wells Fargo,” Bove wrote in a note published just after the hearing ended.
Berkshire offered no official comment on Combs’ addition to JPMorgan’s board.
Bove’s speculation has garnered a lot of attention — and concern — since such a large share unloading is uncharacteristic for Buffet; as CNBC noted, his preferred holding period is “forever.” If Buffett walks on Wells in a spectacular fashion, Stumpf’s board may suddenly look slightly less friendly than the strangers in a dark alley Warren spoke about.
What’s clear is that this issue is far from over. Stumpf will appear before a House committee, and this is an issue that, no doubt, is a topic of conversation at the board table. Investors will demand a change at the top and are likely strategizing about what to do in order to save the reputation of the bank that has been left tattered. Meanwhile, every other bank in the country is strategizing, too. As Karen Webster said in her piece when the news broke, the actions of Wells Fargo employees isn’t just contained inside of its four walls. The very vociferous voices on the Senate Banking Committee yesterday have all of the ammunition they need to hammer home the “too big to fail” issue and to further put the screws down on all banks, not just Wells. The CFPB, too. It’s going to be a very long year. And somehow, “I’m terribly sorry” just doesn’t cut it.