Ed's Blog

Wells Fargo Chairman and CEO John Stumpf goes before the Senate Banking Committee Tuesday (9/20 at 10am ET, watch live) to explain the recent $185 million in combined civil penalties by the Consumer Financial Protection Bureau (CFPB), the U.S. Office of the Comptroller of the Currency (OCC) and the City of Los Angeles over a sales goals incentive scandal that led to employees opening some 2 million fake, secret accounts without the knowledge of customers. Some 5,300 apparently mostly low-level bank employees have been fired. The $100 million to the CFPB is its largest penalty to date, as CFPB Director Richard Corday explained

"This is the largest penalty the Bureau has ever imposed for violations of federal consumer financial law. It reflects the severity of these violations, the breadth of the unfair and abusive practices, and how seriously we take them."

The City and County of Los Angeles collected a $50 million penalty in its companion action and the OCC an additional $35 million. The orders also include full restitution to victimized consumers, esitimated at an additional $2.5-$5 million.

How will CEO Stumpf respond to the growing public clamor for a clawback of bonuses paid his top retail executive, Senior Executive Vice President of Community Banking Carrie Tolstedt, whose retirement with a $125 million golden parachute package had been announced earlier this summer? 

On Friday, Banking Committee Senators Elizabeth Warren (MA), Sherrod Brown (OH), Jeff Merkley (OR), Jack Reed (RI) and Bob Menendez (NJ) wrote Stumpf to ask whether clawback provisions would be used. From the Senators' release:

"The senators noted that Tolstedt, who led the Community Banking division through the time in which the misconduct occurred, received more than $20 million in annual bonuses between 2010 and 2015 - bonuses justified by the company in certain instances because of the "strong cross-sell ratios" in her division. [...] The letter details the clawback provisions Wells Fargo implemented following the 2008 financial crisis, which were "designed to prevent exactly what happened with Ms. Toldstedt: shareholders and consumers bearing the burden of bank misconduct while senior executives walk away with multi-million dollar awards based on what the company later finds out are fraudulent practices."

So far, Stumpf has been cagey on the clawback question, as reported here in the Charlotte (NC) Observer: "In a CNBC interview Tuesday, CEO John Stumpf said “to the extent (clawbacks are) a consideration, we have a board process.” But as our colleagues at Americans for Financial Reform point out, regulators can also use their authority to compel clawbacks.

The Senate hearing offers an opportunity to answer a number of questions. Here are just a few:

  • What did senior executives know and when did they know it?
  • Some 5,300 employees, apparently mostly front-line tellers and people who sit at lobby desks, were fired. How many were higher-level "managers" and their "managers?" How many were bank executives?
  • Does senior management insist that this was a low-level, non-systemic, non-cultural, problem?
  • How could 5,300 firings constitute a "few bad apples," and not a rotten barrel symbolizing a broken corporate culture?
  • What did the board of directors know and when did they know it?
  • What did the board do about it and when did they do it?
  • If the board didn't know, why not? If the board did nothing, why not?
  • Without clawbacks for senior executives, how can Stumpf justify claims that Wells Fargo has a good corporate culture and that he has maintained that good culture by his actions to date?
  • Can a board chairman investigate his CEO's conduct, when he is himself also that CEO?

Other members of the Banking Committee are expected to ask tough questions tomorrow. As reported by Bloomberg: “I have many additional questions for Wells Fargo," said Senator Mark Warner, a Democrat from Virginia, after he met with [Wells Fargo President and potential CEO Tim] Sloan:  “I have deep concerns about Wells Fargo’s response to this prolonged fraud."

Of course, we also wonder whether opponents of the CFPB will somehow claim Wells Fargo cleaned this mess up themselves and that CFPB action was unnecessary. In fact, we hear that's one ridiculous narrative being spun by Wells lobbyists on Capitol Hill. Will any Senator repeat it publicly?

The Wells Fargo case demonstrates that to protect consumers in the financial marketplace we first need strong federal laws; then we need strong federal agencies to enforce those laws; then, we need strong state and local partners ranging from state attorneys general to city and district attorneys to enforce local, state and federal laws; and we also need strong private rights of action so consumers can enforce those laws. Finally, we also must rely on constant vigilance from an independent, questioning press. The Wells Fargo scandal, for example, was first-broken by (now-retired) Los Angeles Times reporter Scott Reckard in this 2013 story.

Wells Fargo neither denied nor admitted charges in the consent decrees with regulators. However, PIRG commends the CFPB in particular for very clear language in its consent decree (see paras. 59-61) that the $100 million payment is a penalty to the U.S. government that is not tax-deductible and cannot be offset in any way. PIRG research has consistently found that the CFPB's consent decrees (as opposed to those of other federal regulators) contain the strongest language protecting taxpayers from corporate wrongdoers that seek to write off their penalties the same way they write off their advertising expenses or executive perks.

Civil and criminal investigations by U.S. Attorneys in the Wells Fargo case continue, as reported in numerous outlets including the New York Times.

if you are a Wells Fargo customer, the CFPB has your back. You don't have to do anything to get your money back and any remaining secret accounts closed. Here's an explanation and tips on protecting your money from the CFPB for any bank customer. Any consumer with a complaint about any bank, payday lender, student loan, debt collector, credit bureau or other financial firm can complain to the CFPB here. Any employee who believes that her firm is engaged in any sort of illegal activities can learn about your federal whistleblower rights here.

The idea of the CFPB needs no defense, only more defenders. Meanwhile, despite the young bureau's ongoing and even "heroic" efforts to make the marketplace fair, it remains under unfounded special interest attack. Go figure.

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