Once again, a big banking scandal is making headlines. Earlier this month it was discovered that Wells Fargo & Co (NYSE:WFC) employees had secretly created 1.5 million unauthorized accounts since 2011. Employees also submitted phony applications for more than 565,000 credit card accounts.
Not only did the fake accounts gain the bank unwarranted fees, but they also allowed employees to boost their sales figures. Over the years, WFC has let go of 5,300 employees as a result of the behavior.
Now Wells Fargo is being hit with a whopping $185 million fine by the Consumer Financial Protection Bureau (CFPB), which has said that the company will pay “full restitution to all victims.”
A full $100 million of that will go toward the CFPB’s Civil Penalty Fund — the largest since the bureau was founded in 2011 — $35 million to the Office of Comptroller of the Currency and $50 million to the City and County of Los Angeles.
In addition, WFC will need to adjust its sales practices and internal oversight.
U.S. Senator Elizabeth Warren and four other Senate Democrats called on CEO John Stumpf to testify before the Senate Banking Committee, and to say they grilled him would be an understatement.
Warren said that Stumpf’s apology simply wasn’t good enough and went so far as to call for his resignation — Stumpf later resigned from a Federal Reserve advisory panel. There were a lot of fireworks in that room, and in the end I think Stumpf’s handling of the situation was terrible after previously promising to fall on his sword.
What This Means for WFC Stock
This is a classic investor dilemma. A company’s stock takes a hit on a scandal — it’s down 8.5% since the new broke — to the point where several major Wall Street firms have rushed in to place buy recommendations.
If this were a clothing retailer like Lululemon Athletica Inc. (NASDAQ:LULU) or Abercrombie & Fitch Co. (NYSE:ANF) and the CEO dissed wide swathes of the American public, the answer would be simple — you’d sell and avoid the stock like the plague. But in this case, Wells Fargo does business with one in six Americans, which Stumpf graciously reminded us in the beginning of his testimony, and many simply aren’t going to move their accounts.
There is no urgency to buy WFC here for several reasons, including macro issues such as the economy, regulations and near-term company reputation.
On that note, when it is clear that banks are a good buy in general, I would look at Goldman Sachs Group Inc (NYSE:GS) and regional banks centered in the south and west first.
In the end, while I have no issue with people investing in things like cigarettes and alcohol, I do draw the line at massive theft from the public. I’d sleep better at night owning a company that does business the right way.
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