For Wells Fargo CEO Tim Sloan, it was a virtual no-win scenario.
Summoned by the House Financial Services Committee to testify about the San Francisco-based lender’s ongoing regulatory issues, he contended with repeated suggestions from Democrats, who now control the chamber, that Wells Fargo has become “too big to manage,” a thinly veiled reference to the 2008 financial crisis, when bailed-out banks were criticized as “too big to fail.”
From the Republican side of the aisle, meanwhile, his company was lambasted for scandals that have fueled enthusiasm for splitting up large financial institutions as the 2020 presidential campaign gets under way.
“The bank’s actions have given a voice to those who want to unfairly taint the reputation of the entire banking sector,” Rep. Andy Barr, R-Ky., told Sloan. “Your bank’s misconduct has fueled the kind of unfair hyperbolic and anti-bank rhetoric you will hear today, which threatens access to capital, job creation, and economic growth.”
The third-largest bank in the U.S., Wells Fargo’s fortunes have seen a dramatic decline since it reaped kudos in the aftermath of the financial crisis for sufficient strength that it didn’t require a bailout, unlike rivals Citigroup and Bank of America.
The spiral dates to at least 2016, when Wells Fargo paid $185 million to settle claims that employees struggling to meet aggressive targets, which included selling as many as eight different products to each customer household, had created millions of unauthorized customer accounts.
[Related: Republicans blame Wells Fargo scandals for ‘anti-bank rhetoric’]
The revelations and the fiery congressional hearings afterward spurred the departure of then-CEO John Stumpf, whom Sloan replaced. The bank also lost a number of lucrative government projects and grappled with customer and shareholder lawsuits and a string of hefty fines from regulators.
As recently as February, insurers for current and former Wells Fargo leadership, from Sloan himself to board members, agreed to pay $240 million to settle investor lawsuits claiming they didn’t live up to their responsibilities to prevent the fake-accounts scandal.
In December, the company agreed to pay $575 million to resolve claims with prosecutors in all 50 states and Washington, D.C., related to both the phony accounts and issues in its auto- and mortgage-lending businesses. Before that, the bank shelled out $1 billion to settle government claims it sold some auto borrowers insurance they didn’t need under the pretense they might not qualify for their loans otherwise and charged fees to mortgage customers that it was supposed to be absorbing. In August, the bank said it would pay $2.09 billion to settle Justice Department allegations that the bank packaged mortgages that were higher risk than they appeared into securities sold before the financial crisis.
Perhaps the most significant action, over the long term, was the Federal Reserve’s 2018 order barring the bank from expanding its total assets beyond the amount held at the end of 2017 until it resolves the regulator’s oversight concerns.
“This punishment and the fines imposed have not changed the bank’s behavior,” said Committee Chairwoman Maxine Waters, a California Democrat who stepped into her current role when her party regained a majority in the House after November’s midterm elections.
“Wells Fargo’s ongoing lawlessness and failure to right the ship suggest the bank, with approximately $1.9 trillion in assets and serving one in three U.S. households, is simply too big to manage,” she added during the March 12 hearing.
Rep. Stephen Lynch made a similar argument. “If I were you, and you really wanted to do the right thing, put this bank on the right path: Break it up,” the Massachusetts Democrat told Sloan.
“Decide how you would dismantle it, so we don’t lose all the jobs,” he added. “You’re way too big. Your conduct has been disgraceful, and I think you would serve your customers and you would serve the financial system and our country much better if you agreed to just break up the bank in functioning pieces that are able to be accountable to their customers and to the general public.”
[Also read: ‘Wells Fargo doesn’t belong at colleges,’ Elizabeth Warren tells CEO]
GOP lawmakers, who not infrequently disagreed with Democratic claims that Wells Fargo’s size was the root of its problems, offered Sloan opportunities to counter those arguments.
While companies “must be held accountable when they’re scamming hard-working Americans,” breaking up large banks can damage the economy, said Rep. Roger Williams, R-Texas, who cited comments from former President Barack Obama to back up his point.
In an April 2016 interview with the New York Times, Obama conceded Sen. Bernie Sanders, a presidential candidate then and now, was correct to say that his administration hadn’t broken up large banks or dismantled the financial system.
“But one of the things that I’ve consistently tried to remind myself during the course of my presidency is that the economy is not an abstraction,” Obama told the Times. “It’s not something that you can just redesign and break up and put back together again without consequences.”
Sloan, like JPMorgan Chase CEO Jamie Dimon, whose bank is the largest U.S. lender, agreed that breaking up large financial institutions doesn’t make sense.
Nonetheless, “I also believe that no bank is too big to fail, if they don’t operate in an appropriate way,” he said.
Breaking up giant financial institutions has been a rallying cry for critics like Sen. Elizabeth Warren, a Massachusetts Democrat who wants her party’s nomination to run against President Trump in 2020 and believes the 1999 repeal of the Glass-Steagall Act was a mistake. The Depression-era law required the separation of securities-trading businesses from consumer banks handling federally insured deposits.
Splitting up Wells Fargo would ultimately hurt access to capital for U.S. entrepreneurs, Sloan maintained. “There’s a place in this country, and we see that today, for community banks, for medium-size banks, and for large banks,” he said. “We can invest billions of dollars in products and services that sometimes our small and medium-size competitors can’t.”
It’s unlikely that argument will satisfy Warren, who has previously introduced a Senate bill bringing back Glass-Steagall and suggested that the Fed not lift its growth cap until Sloan is replaced.
“Do you realize if someone on Main Street caused such hazardous results, whether it was stealing their money or conning them, they’d go to jail?” Rep. Gregory Meeks asked Sloan. “At your bank, that you’ve been a part of for 31 years, no one has paid a punishment at all. People have left; some still received a bonus; people have stayed as you have and got promoted. When the general public looks at this, they do not see any justice at all. Nothing.”
The criticism both Sloan and his bank faced wasn’t limited to Capitol Hill. Shortly after the hearing ended, the Office of the Comptroller of the Currency, one of the company’s regulators, reaffirmed its dissatisfaction.
“We continue to be disappointed with Wells Fargo Bank N.A.’s performance under our consent orders and its inability to execute effective corporate governance and a successful risk management program,” agency spokesman Bryan Hubbard said in a statement. “We expect national banks to treat their customers fairly, operate in a safe and sound manner, and follow the rules of law. “
Such a public rebuke is unusual, even when regulators are unhappy with a CEO’s public statements or testimony, and may signal that Wells Fargo is already subject to a confidential enforcement action, said Jaret Seiberg, an analyst with Cowen Washington Research Group, which has tracked federal policy for the past four decades.
JPMorgan operated under one, which prevented its expansion into new markets, for five years, and the action was only made public when it was rescinded, Seiberg noted.
Wells Fargo’s “troubles in Washington appear to still be getting worse rather than improving,” he said. “And that would suggest the bank will be limited in how it can grow and operate for the foreseeable future. Prospects for escaping this scrutiny earlier are low.”
