Wells Fargo & Co (NYSE:WFC) tried to staunch the bleeding from its phony account scandal on Tuesday. WFC clawed back $41 million in CEO John Stumpf’s planned stock bonuses, cancelled the severance and $19 million in awards previously given Carrie Tolstedt, the former retail banking chief at the heart of the scandal and promised an investigation from which Stumpf will recuse himself.
But the anger over its opening 2 million phony accounts, and charging for them, continues to grow. And the anger towards WFC will grow louder as Congress learns of another possible sanction, of $20 million, for repossessing soldiers’ cars illegally.
The penalty in this case matters much less than the appearance. And the appearance is hurting Wells Fargo’s shareholders, starting with Warren Buffett, but also including small fries like me, who are out a collective $22 billion in equity, lost since the fraud was unveiled on Sept. 8.
Even today, the price-to-book ratio for WFC stock is 1.27, the highest among big banks. (The price-to-book of JPMorgan Chase & Co. (NYSE:JPM) is at 1.06, and the other big banks sell for much less than book value.) On Sept. 8, Wells Fargo’ price-to-book was 1.42. In financial terms, WFC still retains its reputation as America’s most honest big bank.
This is not good.
Time to Buy WFC Stock?
Some analysts are saying Wells Fargo shareholders have suffered enough — that it’s time to buy financials as the Federal Reserve prepares to raise interest rates.
Priyank Gandhi of the Notre Dame business school writes WFC stock has suffered enough since the fraud only created $2.6 million in fees, a pittance, and the incentives that led to the fraud represent “best practices” in the industry.
Some Republicans want to go after the “cops” who first fined the bank, the Consumer Financial Protection Bureau, claiming it should have found the fraud on its own, and sooner. Ironically, those same Republicans have sought laws to get rid of the agency, claiming it was unnecessary. A hearing before the House Financial Services Committee Thursday will be the next act in the drama.
By some measures, WFC stock is already in the bargain bin. Its price-to-earnings ratio is now down to 11, well short of the 13.1 P/E of Bank of America Corp (NYSE:BAC). Wells Fargo stock is now down 17% for the year. As previously noted, bank stocks should rise once the Fed raises rates, which is considered likely in December.
How Much Worse Can It Get for Wells Fargo?
It could get a lot worse.
The Department of Labor now says it is looking at “a number of” whistleblower complaints, after a half-dozen former employees went to the media, saying they were fired for questioning the bank’s practices. The department has also opened a special Web page for former Wells Fargo employees. Some former employees have also launched a class action lawsuit seeking $7.2 billion.
In a separate investigation, the bank’s trading arm recently paid a $400,000 fine over phony commodity swap contracts.
As to the action the bank has already taken, Stumpf still looks set to get $123 million if he resigns and Tolstedt had about $98 million in Wells stock when she retired. Tolstedt is also named in a lawsuit covering the scandal.
Let’s not forget there is an election coming up in a little over a month. Legislators, regulators and the Obama Administration want to look good, and right now there’s no easier way to look good than to go after bankers whose hands have been caught in the cookie jar.
In short, Wells Fargo is still not in front of this scandal. It needs to prioritize the institution’s future over the careers of the people involved. WFC stock may be near its lows, but it’s unlikely to bounce back quickly from here.
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.
