There are few people who have written about Wells Fargo (NYSE:WFC) as much as I have over the past five years. Yet, just like everyone else, the recent revelation that employees in its branches opened up to two million fraudulent accounts without customers' knowledge or approval from 2011 to 2015 took me by surprise.
But while this was bad enough, Wells Fargo's response has shined an even more revealing light on the culture and ethos that evidently permeate throughout its executive suite. This is important, because while Chairman and CEO John Stumpf can deny that he knew anything about what was going on in its 6,000-plus branches over half a decade, he can't shirk responsibility for the bank's response.
A poor choice of words
Let's start with Stumpf's defense of the executive who ran the division that perpetrated the fraud: Carrie Tolstedt. Here's what Stumpf had to say when Tolstedt announced that she would retire at the end of the year, relinquishing her authority over its branch network on July 31:
A trusted colleague and dear friend, Carrie Tolstedt has been one of our most valuable Wells Fargo leaders, a standard-bearer of our culture, a champion for our customers, and a role model for responsible, principled and inclusive leadership. Because of her passion for serving our customers, wherever and however they chose to receive their banking services -- online, in branches, or via mobile phones -- Carrie leaves Wells Fargo uniquely positioned to continue to be a leader in retail banking, no matter how the future of banking evolves. We share in the pride that she has for the legacy, accomplishments, and talent that she will leave behind.
I understand that Stump has worked with Tolstedt for many years, both came from Norwest, which merged with Wells Fargo in 1998. And I appreciate that she must be an impressive woman and skilled executive. Ascending to the top ranks of the nation's third biggest bank by assets is no easy feat. And she did so in the male-dominated world of finance, further demonstrating how extraordinary her skillset must be.
But Stumpf's choice of words in his comments announcing Tolstedt's retirement was unfortunate. Did he have to say that she was the "standard-bearer" of Wells Fargo's culture? Did he really need to posit that she was a "champion" for the bank's customers?
Clearly, when Stumpf said these things, he knew about the massive fraud that had taken place in her division over an extended stretch of time. After all, the bank had conducted its own multi-year investigation into it by then, revealing that two million accounts had been opened for customers without customers' knowledge or approval, and firing more than 5% of its branch employees as a result.
Given this, how did Stumpf think that his claim about Tolstedt being a standard-bearer of Wells Fargo's culture would play after the world learned of the massive fraud that occurred under her watch? One could even interpret it, though I don't, as evidence that Wells Fargo sanctioned the fraud at the very highest levels -- both in its executive suite and in the boardroom, as Stumpf is chairman and CEO of the bank.
And to pretend as Wells Fargo has that Tolstedt's retirement had nothing to do with the fraud on her watch is absurd and smacks of dishonesty. When asked about the connection, a spokesperson for the bank told Fortune that the timing of Tolstedt's exit was the result of a "personal decision to retire after 27 years" with the bank.
If that weren't enough, Tolstedt is set to receive upwards of $93 million upon leaving the bank (though this is tied to its share price, and has thus dropped recently as its stock has suffered), thanks to the millions of shares of Wells Fargo stock she was awarded along the way. That makes Tolstedt the second biggest beneficiary of the fraud, as her payment comes up just short of the $100 million fine that the bank paid to the Consumer Financial Protection Bureau.
There are times, in other words, when it pays to mince words. But even though this was one of those instances, Stumpf nevertheless chose to lavish praise on the executive most accountable for materially tarnishing the reputation of the 164-year-old bank.
Blaming the employees
If the executive in charge of the unit that committed such a massive fraud doesn't deserve to be admonished, who does? According to Stumpf, it's the employees -- you know, the bank's hourly workers who probably barely make ends meet and, by all accounts, were hounded relentlessly by managers to cross-sell financial products to the dwindling number of customers that visit its branches nowadays.
"There was no incentive to do bad things," Stumpf told The Wall Street Journal on Tuesday. And commenting on the bank's decision to fire 5,300 employees in response to the malfeasance, he noted that "if they're not going to do the thing that we ask them to do -- put customer values first, honor our vision and values -- I don't want them here."
Stumpf says this despite widespread reports, growing in number every day, suggesting that Wells Fargo's employees fraudulently opened up to two million customer accounts simply because the employees faced unrealistic sales quotas and wanted to keep their jobs. In fact, Wells Fargo has all but admitted that this was the case, announcing this week that it eliminated sales quotas and cross-selling in its "stores," which it uses to describe branches to reflect its aggressive sales culture.
At least Wells Fargo's CFO had the decency to acknowledge this. The fraud stemmed from "people trying to meet minimum goals to hang onto their job," John Shrewsberry said at an industry conference on Tuesday.
As someone who has followed and admired Stumpf for years, it blows my mind that he's laying the blame on the "team members" of his bank that are the most unable to protect and provide for themselves while at the same time coming to the defense of the executive who oversaw the fraud and is set to leave the bank with a nearly nine-figure payday. Somebody at Wells Fargo needs to bring Stumpf's attention to how bad that looks to the average person.
Diminishing the fraud
It's understandable that Wells Fargo wants to paint all of this as if it were an exception to the standard operating procedures throughout its branch network. I trust that's what any respectable PR firm would advise its typical clients to do. But Wells Fargo isn't a typical bank. It's an extraordinary one, and, as such, should handle this in an extraordinary way, by embracing transparency.
But Wells Fargo has instead focused many of its public comments on trivializing the extent of the fraud. Take Shrewsberry's remarks on Tuesday about the bank's investigation into the issue:
Let me provide some context regarding the accounts included in the review process. We commissioned a third-party consulting firm to conduct a review of all of the deposit and credit card accounts open since 2011, which included 82 million deposit accounts and nearly 11 credit card accounts. Of these 93 million accounts reviewed, approximately 2% were identified as accounts where we could not rule out the possibility that an account was unauthorized.
We included these accounts in a further review to determine if we will do a refund. Based on that review, we identified approximately 115,000 accounts or 0.12% of the 93 million accounts examined, that had incurred fees where we could not rule out the possibility that they may not have been warranted. We've refunded a total of $2.6 million to those customers, an average of $25 per account. We take this issue very seriously.
We can all appreciate why Shrewsberry would present the bank's case in this way, but there are two patent weaknesses with his explanation. First, by reviewing all deposit and credit card accounts that were opened from 2011 to 2015, the analysis undoubtedly captured many that weren't opened in a branch. And second, by not limiting the sample to cross-sold accounts (not new ones) opened at the behest of a branch employee, the 2% figure that Shrewsberry cites is all but meaningless.
The percentage that would actually tell us something would be calculated by comparing the number of fraudulent accounts that were opened to the number of cross-sold accounts that were opened in branches. Suffice it to say, this is undoubtedly a much larger percentage than the 2% figure cited by Shrewsberry. And it's that percentage that would shine a more accurate light on the extent to which these behaviors were ingrained in the bank's ordinary activities.
At the end of the day, Wells Fargo has built up a stellar reputation over the past 160-plus years, but, as its largest shareholder Warren Buffett has noted in the past, it takes only a short amount of time to ruin it.