Wells Fargo & Co (NYSE: WFC) shareholders were caught completely off guard by the extent of the company’s fraudulent behavior related to its recent $185 million settlement, and now Wells Fargo CEO John Stumpf is getting taken to the woodshed by Senator Elizabeth Warren and others on the Senate Banking Committee.
In case you’ve been living under a rock, Wells Fargo must pay $185 million in settlements to quell the damage done by Wells Fargo’s “widespread illegal practice” of signing customers up for phony accounts to meet sales quotas.
Senator Warren is calling for Stumpf to take responsibility and resign. “It’s gutless leadership,” Warren said.
WFC stock is down 8.5% since the beginning of September, and there is likely more downside in the near term.
What’s $185M to WFC Stock?
First of all, WFC should have no problem managing the $185 million settlement itself. WFC generated $22.9 billion in income in 2015. However, the actual cost related to the fraud charges will be much higher.
This was not simply a case of one rogue banker taking advantage of customers. Wells Fargo reportedly opened 85,000 fraudulent accounts. That’s not a bad apple; that’s a rotten orchard. WFC now has to completely re-think its sales strategy. It has already dropped its sales quotas for bankers and put a temporary hold on cross-selling financial products. But if WFC has been up to anything else sketchy in recent years, regulators will now be searching extra hard to dig it up.
WFC investors shouldn’t be surprised if the Federal Reserve is particularly tough on WFC next year during its CCAR. After all, the stress tests, the CCAR and even the creation of the Consumer Financial Protection Bureau were all intended to prevent this type of dubious behavior within the banking industry.
This week, UBS analyst Brennan Hawken said that he believes the combination of the costs associated with a shifting business strategy and intensifying regulatory scrutiny will knock 10 cents off of Wells Fargo’s 2017 per-share earnings.
A Blow to the Reputation of Wells Fargo
The cost to Wells Fargo’s business is one thing, but it’s hard to put…
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