The bad news just keeps coming. Not only did Wells Fargo open millions of unauthorized accounts for customers — 1.4 million more than they originally disclosed — new revelations show that Wells Fargo also forced unnecessary collision insurance on 800,000 consumers. And now the bank’s mortgage arm has come under fire for changing loan terms, falsifying records and stealing from mortgage bond investors.
Wells Fargo right now looks like the poster child for everything that is wrong with the financial services industry. Will they survive? Most likely, yes. But the bank sure isn’t making it easy on itself, as the laundry list of fraudulent activities and shady dealings grows.
Indeed, Wells Fargo CEO Timothy Sloan acknowledges more negative press is likely on the horizon, particularly once an expanded third-party review of its consumer sales scandal has been completed.
“The results of our reviews will generate news headlines,” Sloan said in a company-wide message. “As we face this renewed coverage, the best thing we can do is stay focused on fixing problems.”
When billionaire investor and major Wells Fargo shareholder Warren Buffet heard what Sloan predicted, he quipped that “there’s never just one cockroach in the kitchen when you start looking around.”
As the third largest financial institution in the U.S., the bank is “too big to fail,” as the expression goes. But they’ve severely damaged their once-venerated brand, and it will be a long, hard slog for Wells Fargo before it can rebuild its reputation.
The List of Mistakes Keeps Growing
In November of last year, when Warren Buffet heard about the massive cross-selling scandal that Wells Fargo had created, he said they were “a great bank that made a terrible mistake.”
But they didn’t just make a single mistake. They made many, many mistakes:
Phony accounts. Originally, Wells Fargo had estimated its employees had fraudulently opened some 2.1 million phony accounts But new estimates add up to 3.5 million bogus accounts — almost 70% more than initially reported. As a result, Wells Fargo said it will have to add $2.8 million in refunds to consumers to the $3.3 million previously refunded.
Welching on GAP. GAP insurance is designed to cover an insurance claim on a new car if the loan is underwater, but Wells Fargo failed to make good on its payouts.
Insurance scam. An internal Wells Fargo report that showed the bank had charged more than 800,000 people for auto insurance they did not need, leading 274,000 customers to become delinquent on their car loans and nearly 25,000 to have their vehicles repossessed.
Sneaky loan terms. The mortgage banking unit came under fire for secretly changing the loan terms of mortgage borrowers in bankruptcy. Customers who were struggling financially might have been happy with lower mortgage payments… but not so happy when they found that Wells Fargo added decades to the mortgage terms, which would earn the bank more income.
Forged mortgage docs. The mortgage division also stands accused of falsifying records so they bank charge mortgage applicants for delays in application processing that had been caused by Wells Fargo.
Broken bonds.Well Fargo was essentially stealing from mortgage bond investors to pay legal fees in lawsuits filed by those investors.
Axing whistle blowers. Two former Wells Fargo managers just filed a $50 million lawsuit alleging that they were terminated for whistle blowing. Wells Fargo denies the terminations were retaliatory.
“Every new disclosure seems to expand the scope of the bank’s troubles, which creates the perception that the scandal is getting bigger rather than going away,” said Jaret Seiberg, an analyst with Cowen Washington Research Group.
Rolland Johannsen, a bank consultant at Capital Performance Group says that consumers’ trust in the bedrock of any bank’s brand.
“It takes years for banks to build up their reputations and their brands,” he says. “But it only takes a minute to lose it.”
“Wells Fargo’s dramatic fall came because the company ticked off the three top reasons consumers downgrade a company’s reputation. According to Harris 85% of Americans consider intentional wrongdoing or illegal actions by corporate leaders something that hurts their opinion of a company. In addition 83% take issue with a company lying or misinterpreting the facts about a product or service and 82% have a problem with intentional misuse of financial information for financial gain.”
— The Motley Fool
Wells Fargo’s Gift to Its Competitors: A Major PR Fiasco
“If a corporation has proved time and again that it cannot behave in an ethical and legal fashion, then it should be put down.”
— Ryan Cooper, Writing in ‘The Week’
Fraud was committed and consumers were harmed, including some who were forced to file bankruptcy and others whose cars were repossessed. Credit scores were impacted. Even though Wells Fargo created a sales culture with a warped incentive system that encouraged employees to take advantage of consumers, not one Wells Fargo executive immediately lost his or her job… at least not until CEO John Stumpf was asked to leave.
In fact, just two months before it agreed to pay a $185 million fine, Stumpf had called Carrie Tolstedt, Wells Fargo’s Consumer Banking Head and overlord of the cross-selling scandal, “a standard-bearer of our culture” and “a champion for our customers.” Tolstedt was retiring… with a $124 million payout.
If all that wasn’t bad enough, what is even more astonishing about Wells Fargo was how they responded to this self-inflicted crisis.
Wells Fargo’s response baffled many. “What I mistook as a calculated PR strategy turns out to be a deadly combination of arrogance and stupidity,” says Tom Lee, Senior Partner at 451 Marketing.
The Blame Game
Remember the Johnson & Johnson cyanide-laced Tylenol crisis in 1982? J&J CEO James Burke was widely lauded for his full public disclosure and immediate action, and as a result J&J retained a strong brand throughout the crisis. In contrast, Stumpf never fully took responsibility. Instead he tried to minimize the impact of the bank’s actions, and passed the buck by blaming low level employees.
Even when members of the U.S. Senate Banking Committee grilled him, Stumpf continued to downplay the crisis, saying, “I disagree with the fact that this is a massive fraud.”
Then when asked if consumers credit scores were harmed, Stumpf tried to dodge the question by claiming he didn’t know how the algorithms worked.
Wells Fargo CFO John Shrewsberry also offered a mealy mouthed defense of the bank’s bad behavior, echoing Stumpf’s assertion that employees were to blame. “It was really more at the lower end of the performance scale, where people apparently were making bad choices to hang on to their job,” Shrewsberry said.
For all the bobbing and weaving like this that Wells Fargo has done, one could argue they deserve all the criticism their competitors can dish out. It’s bad enough they screwed over millions of Americans, but they botched the public relation’s component with nearly the same degree of carelessness.
In Crisis Communications 101, the first lesson is to always get ahead of the story. Be proactive. Be contrite. Come clean right away with what you know. Rip that band aid off rather than allowing the story to leak out in dribs and drabs. Instead, Wells Fargo decided to try and wait it out. Not only did this drip-drip-drip of negative news harm its brand, it also negatively impacted employee morale.
“If handled properly, most customers probably would’ve given Wells Fargo the benefit of the doubt again,” believes Lee. “Instead, this incident further deepens the distrust Americans have with their financial institutions, causing massive ripple effects to the banking industry as a whole.”
Heads Should Roll
So what can Wells Fargo do to survive? Since it seems pretty clear that Wells Fargo’s problems were systemic, heads should roll at a high level and new blood should be brought in to regain trust.
David Axelrod, a partner with law firm Ballard Spahr and a former SEC prosecutor says The Wells Fargo crisis is an egregious example of a bank gone wrong. “The rotten culture starts at the top of the organization,” he says. “So it seems like an example where regulators could push for changes at the CEO and C-suite level.”
But instead of new blood, Wells Fargo promoted Tim Sloan, a 29-year veteran of the bank and a former president and COO, to CEO. The bank tapped 32-year veteran Mary Mack to head the bank’s beleaguered Community Banking division. Sloan and Mack may have experience, but they are also steeped in the very culture that needs to be gutted.
“There’s something wrong with Wells Fargo on a cultural basis and you’d think they’d need to bring in an outsider to fix that,” Notes Paul Miller, analyst with FBR Capital Markets.
It wasn’t until Senator Elizabeth Warren called for the Federal Reserve to fire 12 directors who served on Wells Fargo’s board, that the bank announced a “range of board refreshment actions” including naming former Federal Reserve Board governor Elizabeth Duke as independent chair, replacing Stephen Sanger, retiring three long-serving directors, and naming a new independent director and up three additional independent directors. The bank will also change the composition of the board committees.
Will these changes help? Yes. Will they be enough to save the bank’s brand in the court of public opinion? We’ll see… but many of Wells Fargo’s competitors will still be salivating for the next installment in the troubled bank’s ongoing saga.