Wells Fargo & Co (NYSE:WFC) CEO John Stumpf has kept his halo for this decade by avoiding scandal and engaging in basic, blocking-and-tackling banking, while competitors made financial settlements over their actions during the financial crisis.
Now that it’s his bank — WFC — in the line of fire, he is expecting the same treatment. But it’s not 2008 anymore.
During the financial crisis, and in its immediate aftermath, “Too Big To Fail” banks held the economy hostage. Forcing the banks to the wall, prosecuting their leaders, could have turned the Great Recession into another Great Depression, so the Obama administration took the political heat and tread gently.
Today, with a healthier economy, and with Republicans who oppose reform saying Democrats are “in bed with big banks,” there is neither political nor economic motive for anyone to treat Wells Fargo gently.
John Stumpf Risks His Legacy
Stumpf seems not to have gotten the message. He calls himself accountable, but takes no forceful action, other than firing a bunch of low-level employees.
What is plain is that the banks’ incentives caused those employees to open roughly 2 million fee-generating accounts without customer authorization. He seems to think the $185 million fine settles the matter.
It doesn’t. Not in 2016.
The executive who put those incentives in place, Carrie Tolstedt, still has her $125 million severance package after saying she “decided to retire.” John Stumpf still has his $19.3 million pay package, even after shareholders have lost over $20 billion in market cap over the scandal.
He Let the WFC Team Down
The fine came from the Consumer Financial Protection Bureau, an agency created in the wake of the 2008 disaster that House Republicans were about to destroy through a bill called the “Financial Choice Act,” which now looks dead. The industry could have used that act — Stumpf let his team down.
He will testify on Sept. 20 before the committee that approved the bill. Democrats are having a field day and the committee will be under media pressure to appear to go hard on him.
The hearing looks like John Stumpf’s last chance to get ahead of the scandal with his reputation intact. Clawing back Tolstedt’s retirement package, accelerating his own retirement and announcing the choice of a successor untouched by the scandal would seem to be the least he can do at this point.
Bottom Line on Wells Fargo Stock
I am a victim of this scandal myself. I have held Wells Fargo stock for several years, based on their reputation, and with dividends reinvested, I had a nice gain until this broke. That gain has been nearly wiped out.
WFC stock could still fall further. Its price-to-book ratio has been cut to 1.3, but that still makes it the most expensive of the nation’s money center banks — JP Morgan Chase & Co. (NYSE:JPM) is at 1.06. If I were buying bank stocks today, I would buy JPM, not Wells Fargo stock.
Those who don’t own the shares should only consider buying Wells Fargo after Stumpf takes decisive action. Bringing in a successor from outside, someone untouched by what has happened, like Charles Schwab Corp (NYSE:SCHW) CEO Walt Bettinger, might start a rally. Otherwise, there is 30% downside in the shares, bringing the price-to-book number in line with JP Morgan’s.
If he would announce something like that at the congressional hearing, and give back some of his own bonus from last year, he would make that loss back within days on Wells Fargo stock’s rebound.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in WFC and SCHW.
