Please ensure Javascript is enabled for purposes of website accessibility

Wells Fargo: "The Story Line Is Worse Than the Economics"

By John Maxfield – Oct 12, 2016 at 12:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Statements by Wells Fargo executives on a recent conference call suggest that the near-term damage from its fake-account scandal won’t materially hurt its third-quarter earnings.

Wells Fargo's offices in Charlotte, North Carolina. Image source: iStock/Thinkstock.

Despite the raft of negative media attention and the damage to its once-stellar reputation, Wells Fargo (WFC -0.77%) says that the impact from its fake-account scandal will be minimal when it reports third-quarter earnings this Friday.

"To say the last month has been difficult is an understatement," noted President and Chief Operating Officer Tim Sloan on a conference call Monday with 500 or so senior Wells Fargo executives, according to a recording of the call reviewed by The Wall Street Journal. The bank's chief financial officer, John Shrewsberry, nevertheless went on to say that "the story line is worse than the economics."

This should come as a relief to shareholders of the nation's third biggest bank by assets, including me. But rest assured that Wells Fargo is still in the early innings of its self-inflicted debacle.

Keeping regulators at bay

The biggest problem it faces will be holding lawmakers and industry regulators at bay, as more and more stories about its mistreatment of employees and customers surface in the days and weeks ahead.

At the end of last week, NPR's Planet Money podcast shined a light on the extent to which Wells Fargo's unreasonably aggressive sales culture allegedly presented its branch-based employees with a Hobson's choice: either open unauthorized accounts for customers in an effort to boost the bank's cross-sale ratio (and thus senior executives' yearly bonuses) or be fired in such a way that they stood essentially no chance of ever working for another bank again.

You can image the bind this put employees who supported families in. That is the story here that matters most. Its customers, while defrauded, are much easier to remediate. But the only way the bank's disparaged former employees will get relief is to file lawsuits, which has already started to happen. And if the allegations about Wells Fargo's treatment of employees is true, that ain't gonna go over well with jurors.

Moreover, with the Democrats potentially on the verge of gaining control of both houses of Congress, this won't (and shouldn't) be ignored by the likes of Sen. Elizabeth Warren (D-Mass.), who's long been a proponent of reining in the nation's biggest banks. She went so far last month as to urge the government to open a criminal investigation of Wells Fargo -- something that's purportedly underway.

And the same is true of the bank industry's regulators: the Consumer Financial Protection Bureau, Federal Reserve, Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. All of these regulatory bodies were lampooned by Republican members of Congress last month for not catching the fraud earlier. This will only embolden them to make sure that Wells Fargo gets its just desserts.

There are also countless state and local agencies that are undoubtedly salivating at the prospect of raiding Wells Fargo's resplendent coffers. The City and County of Los Angeles got $50 million of the $185 million in fines that Wells Fargo has already paid. That could go a long way in cash-starved cities around the country.

A slow but sustained drip

Any additional fines or settlements may amount to a drop in the bucket compared to Wells Fargo's roughly $5.5 billion in quarterly earnings. This goes to another point Shrewsberry made on the call, that the impact thus far isn't "really amounting to much in terms of dollars yet." But the bigger problem is that it keeps the bank in the news, further eroding its reputation and reminding prospective customers that banking elsewhere may be in their best interest.

Moreover, while few existing retail customers are likely to flee the bank given how inconvenient it is for them to do so (this is one reason Wells Fargo wanted each of its customers to use at least eight of its financial products), larger institutions aren't so inextricably bound. Cities like Santa Cruz (California), Chicago (Illinois), and Seattle (Washington) have withdrawn business from the bank, as have the states of California and Illinois. Even nuns are jumping ship.

The point being, Wells Fargo has a long way to go before it emerges from under this cloud. The bank eventually will, but it's impossible to say how long that will take and what additional monetary or regulatory damage could occur in the meantime.

John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.