Wells Fargo's John Stumpf tries to adjust his glasses with his injured hand at a Senate banking committee hearing on the firm's sales practices on Tuesday
If you want to know if Wells Fargo can recover from its recent scandal that saw two million fake accounts opened and 5,300 employees fired, then just take a look at Warren Buffett’s latest decision, says Dick Bove, senior Wall Street analyst at Rafferty Capital.
He is referring to Buffett’s move to announce on Tuesday he is putting Todd Combs, one of Buffett’s stock-picking deputies at Berkshire Hathaway, on the board of JPMorgan Chase.
“Seems odd no … that Buffett would put an executive on the board of JPMorgan and not on the board of Wells Fargo in which he owns a 10.3% stake?” says Bove. “The fact that he has chosen to make that move this week suggests he has had it with Wells Fargo.”
On Tuesday, Stumpf appeared before the US Senate’s banking committee. During testimony, he said he was “deeply sorry that the bank failed to fulfil its responsibility”, but insisted there was “no orchestrated effort” by the bank to be fraudulent.
Employees at the bank, however, have come out and said they were bullied into meeting unrealistic sales targets that forced them to open the fake accounts.
Bove says this is the first of what are likely to be many investigations into Wells Fargo, and says it is the end of the company’s time as a leader among American banks.
“You have to look across the firm in this instance and say, what the hell are they doing?” he says.
Bove states the sheer number of people involved, and the number of accounts opened, begs many questions – why didn’t the IT department pick up on so many accounts opened but without deposits? Why were so many people fired without management being held accountable? Did management know about this fraud when submitting their 10ks and 10qs?
While the bank denies it knew of the extent of the issue, it was clearly on its radar. An investigation by the LA Times as far back as 2013 revealed to the bank the coercive practices of its sales managers to which the then CFO Timothy Sloan responded: “I’m not aware of any overbearing sales culture.”
The bank also responded to the LA Times’ reporter saying it was in the process of setting up an ethics program office.
Senator Elizabeth Warren, a member of the committee, on Tuesday called the scandal a “staggering fraud”, and pointed out that if Stumpf and other top management really did not know the scope of the scandal, “that tells me this is simply a bank that is too big to manage”.
And as for broader implications on the banking industry, Bove says the scandal is going to make life difficult for all US banks.
“There was a chance that the government would take a second look at the regulations that were brought in after the crisis and maybe ease that regulatory pressure,” he says. “But politically, no one can possibly propose such a bill now, because Wells Fargo has just confirmed that banks are crooks.”
However, Bove also adds that the malpractice also highlights that regulation is clearly not a panacea to curbing banks’ fraudulent behaviour.