Wells Fargo's Year of Scandal Stretches On
September 08 2017 - 5:59AM
Dow Jones News
By Emily Glazer
A year after Wells Fargo & Co.'s sales-practices scandal
erupted, the bank has changed its leadership and lost valuable
ground to rivals. Yet executives still face an array of legal
challenges that may take months if not years to sort out.
In recent weeks, the Justice Department has conducted interviews
with executives in the bank's San Francisco headquarters, according
to people familiar with the matter. The agency last fall began its
investigation into the bank's practices after Wells Fargo entered
into a regulatory settlement Sept. 8 over the widespread opening of
accounts at the bank without customers' knowledge. Wells Fargo has
been cooperating with that investigation.
Last week, Wells Fargo increased its tally of accounts opened
due to improper sales tactics to 3.5 million from the 2.1 million
initially made public last fall. The 67% increase in the fake
accounts brought renewed focus to the scandal, which badly bruised
the bank's reputation, led to the abrupt retirement of its then CEO
and prompted many federal and state investigations separate from
that of the Justice Department.
The Consumer Financial Protection Bureau and Office of the
Comptroller of the Currency are both probing consumer-lending
issues at the bank that have only recently come to light. Those
inquiries are in early stages, people familiar with them said, and
involve insurance products sold by the bank's auto-lending
business.
The insurance issues have led Senate Democrats to call for
congressional hearings, which could open up the bank and Chief
Executive Timothy Sloan to renewed negative publicity. Last fall,
then-CEO John Stumpf was skewered during hearings examining the
sales-practices problems and abruptly retired soon after.
On another front, Wells Fargo is negotiating with the Justice
Department in hope of reaching a settlement related to crisis-era
sales of mortgage-backed securities. Any deal could represent a
charge of more than $1 billion to the bank, according to people
familiar with the talks.
Although other big U.S. and European banks have reached
settlements amounting to billions of dollars, Wells Fargo has so
far avoided such a hit. The issue is likely to come to the fore for
the bank in the next several weeks, the people said.
A Wells Fargo spokesman said the bank has made changes to its
executive leadership, business model, organizational structure and
compensation system over the past year, among other areas. He said
the bank continues to seek out areas of improvement and keep
shareholders informed.
Investors have so far given Mr. Sloan time to clean up the
problems, despite the fact the bank's shares have badly
underperformed big rivals over the past year. In that span, the
firm's market value has fallen by $6 billion, while Bank of America
Corp.'s has risen by about $80 billion and J.P. Morgan Chase &
Co.'s is up about $68 billion.
Although Mr. Sloan was finance chief during part of the time
when sales issues took place, he came up through the ranks in the
bank's wholesale-banking business during his 30 years at the firm.
That unit hasn't been implicated in any of the scandals.
David Katz, chief investment officer of Matrix Asset Advisors
Inc., said he believes the bank is turning itself around, given a
comprehensive investigation that was responsible for unearthing
some of the new problems facing the bank. As well, there have been
changes in both management and the board.
That makes the shares attractive based on both valuation and
their dividend yield, said Mr. Katz, whose firm owns 500,000 Wells
Fargo shares. Plus, Wells Fargo "has a great credit portfolio and
will benefit from rising interest rates."
Of greater concern to many investors is when the bank will pivot
to growth and show an improvement in profit margins.
Tom Brown, whose hedge fund Second Curve Capital owns more than
$1 million in Wells Fargo shares, said he so far has been "very
impressed with how hands-on Tim Sloan is in identifying and
rectifying the problems."
His biggest concern is whether settlements will hit the bank's
growth in capital or potentially hurt increases in dividends or
share repurchases. Mr. Brown added that he doesn't think the bank's
sales-practices issues will be front and center a year from
now.
Even the bank's largest shareholder, Warren Buffett, recently
seemed unperturbed by the bevy of problems that have surfaced at
the bank.
"What you find is there's never just one cockroach in the
kitchen when you start looking around," the chairman and CEO of
Berkshire Hathaway Inc. said on CNBC in late August. "Anytime you
put focus on an organization that has hundreds of thousands of
people...you may very well find that it wasn't just the one who
misbehaved that you find out about."
Mr. Buffett said at the time that he's sticking with Wells Fargo
for the long-term -- Berkshire owns roughly 9.4% of the bank -- and
that mistakes made "are being corrected."
Write to Emily Glazer at emily.glazer@wsj.com
(END) Dow Jones Newswires
September 08, 2017 05:44 ET (09:44 GMT)
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