Wells Fargo is one of the oldest and
most powerful banks in the United States. As of 2022, the bank has nearly
$2 trillion in its hands, ranking fourth in commercial banking nationwide. But since 2018, Wells Fargo's growth
has stalled out, with a hard cap on its assets ordered by the Federal Reserve. They're capped at something close to 2
trillion in terms of its balance sheet. That cap on growth came after reports of
fraud at the bank emerged in the 2010s. We all know about Wells Fargo's fake
account scandal. As this scandal has come to light, Wells
Fargo has paid billions of dollars in fines and sent numerous executives out
the door. Today, the bank is led by CEO Charles
Scharf, a protege of JPMorgan's Jamie Dimon. I was brought in to bring about
substantial change at Wells Fargo, and we have made tremendous changes. Various parts of the government are
still investigating this iconic bank, including offices for consumer
protection, securities, workplace safety and banking. Scholars believe the government has
grounds to go further. The Federal Reserve, in certain extreme
circumstances, has legal power to order effectively a breakup of a large
financial conglomerate over a certain threshold level of assets. And Wells Fargo is clearly way above
that threshold of assets. Chairman Brown, I'm very confident that
we have made changes which will enable us to put all of our historical
problems behind us. So what did Wells Fargo do to end up in
Washington's hot seat? And what does the future hold for this
historic American bank? The business that became Wells Fargo
began as a mail delivery service connecting key points on the U.S. East Coast and Midwest. The founders, Henry Wells and William
Fargo, worked with other couriers around the country. Wells and Fargo split off
from this group to form their own company in 1852 in pursuit of business
opportunities in the California Gold Rush. In the beginning, they ran express
parcel services, essentially, via horse-drawn stagecoaches, and that's
why the stagecoach is still part of the brand of Wells Fargo. Over time, it evolved to be a
traditional bank. Wells Fargo makes money like any other
bank makes money. There's an old saying that banking is
a 3-6-3 business, which is, they take in deposits at 3%, they make loans at 6%,
and then they go ahead and go play golf at 3 p.m.. The bank used this business model to
become a cornerstone of the U.S. financial system throughout its most
notorious episodes. For example, the bank that became Wells
Fargo survived the Great Depression of the 1930s, which saw nearly 7000 banks
close. The story of banking in this country is
a story of consolidation. After the transaction buying Wachovia
in 2008, 2009, it actually, for the first time, had a coast-to-coast
network of branches. The consolidation wave has resulted in
not having any alternative to banking at the large bank like Wells
Fargo. Wells Fargo may be the only game in
town, or it may be the most convenient game in town because they have so many
branches. Today, Wells Fargo has nearly 4800 bank
branches open across the country. We are, I think, the biggest of the
banks here in terms of our presence in rural America. Starting in 2000, the new wave of
consolidation in the industry was happening between banks and primarily
securities firms because now it was allowed, whereas before the year 2000,
it was not legally permissible. Now we started seeing not
only large financial institutions but also diversified one-stop shops, as the
saying went at the time, and institutions like J.P. Morgan and Citigroup and Wells Fargo
and Bank of America Corp, they all are product of that wave of
consolidation. Wells Fargo was also an early mover to
online banking, launching its first website in 1994. It invested in companies like Quicken,
a digital bookkeeping software, and today it's one of many banks behind the
digital payment service, Zelle. It's also historically been one of the
biggest mortgage lenders in the States. Turn the clock back probably ten or 15
years, you would find most of the banks up here as the largest mortgage lenders in the country. That's not even close to
true today. The non-banks have taken an
increasingly larger share of the market. Changes to American laws allowed Wells
Fargo and other banks to open new and riskier wings that trade securities and
derivatives. While one division of Wells Fargo
trades, another may be helping the government execute things like the
Paycheck Protection Program. But at the core of this institution
sits a traditional bank with federal insurance for its depositors funds. In 2021, Wells Fargo managed average
deposits of $834 billion. They use these deposits to go out and
make more money. A bank uses its own balance sheet to
make loans. It takes deposits from people like us,
depositors, who then use these deposits basically to make payments, liquid safe
payments. Anybody who's looked at their checking
account knows that it essentially pays zero. So they've got these very cheap
sources of funding from essentially the American public, and then they make
loans. Wells Fargo's wide footprint makes it
centrally important to the United States, and that made reports of a
multi-million customer scam at the bank headline news in recent years. People were feeling so pressured to meet
sales quotas that they were cheating. We're talking about a scandal here that
involves thousands of their employees, cheating tens of thousands of customers
out of money and making millions of dollars doing it for
the bank. The trouble at Wells Fargo began in the
sales department. When you talk about Wells Fargo, it was
always talked about a strong sales culture. When you look at sort of the
postmortem, it turns out that for a lot of these people to reach their sales
goals, they actually just invented customer accounts. They put real
existing customers into products that they'd never asked for and they
falsified information, falsified signatures, changed phone numbers on
these accounts so that people couldn't complain. They had several mottos over
the years, but one of them was "eight is great." Translation: Try to sell eight products to
one household. In 2013, at the height of the scandal,
a typical customer household at the bank had over six products in its account,
which was four times higher than the industry average. So what happened here was the incentive
within this institution, within Wells Fargo, was to utilize the tremendous
reach of the consumer banking segment of Wells Fargo with all
of those branches. That doesn't mean that every
diversified financial conglomerates goes as far as opening fraudulent accounts
for the existing customers without letting them know because the internal
reward system actually incentivizes such fraudulent behavior. That was the reason why that scandal
was really so incredibly mind blowing, and that's
why Wells Fargo really got into trouble. Reports suggest that up to 3.5 million
fake accounts were opened by Wells Fargo. That said, it wasn't the only
bank opening up fake accounts at the time. Chairman Brown, We regret and I take
full responsibility that we did open up unauthorized bank accounts going back
to 2010. But at Wells Fargo, at least in the eyes
of the government, a wider and more troubling pattern was emerging. Regulators found that some parts of the
bank were violating laws that protect U.S. military members. Wells Fargo was also fined for charging
customers late fees for delays that the bank itself caused. And the bank was issued an SEC fine for
giving investors bad trading advice in the pursuit of profits from fees. The bank was also fined repeatedly for
retaliating against internal whistleblowers, first in 2017, then
again in 2022. While these scandals unfolded, Wells
Fargo sales employees were paid as little as $30,000 in base salary, with
great incentive to make bigger and bigger sales. The new CEO made $21
million in 2021. He says that the leadership has changed
and they're addressing many of the problems despite delays. Between 2017 and 2021, we increased
average wages for our U.S. hourly employees by nearly 25% and
increased investments in our U.S. employee benefits by 20%. Almost 70% of our company's operating
committee is new since I joined. Though our work is not complete, Wells
Fargo approaches issues differently and is a better company than when I
arrived. In a statement to CNBC, Wells Fargo said
the bank is revising its management, risk and control frameworks while
changing the company's culture and policies. They said there's more work
that they must do to rebuild trust and that they're committed to doing that
work. Legal scholars say the long list of
harms unfolding at Wells Fargo is evidence of larger issues within
American banking. The fact that a large institution of
such importance was nevertheless able to engage in fraud, in this illegal,
effectively, transactions on such a scale, that is staggering. That shows a pervasive pattern of
noncompliance. And it also shows that the top
management and the board of directors of Wells Fargo was really not doing its
job properly. They are much more prone to abusing
their power to increase their profits and that they are so big that they will
never be allowed to fail and they know it. We still have a problem on Wall Street
where these giant financial institutions think they can make money. They can build profit models around
cheating the American people. In 2018, Senator Elizabeth Warren asked
the Federal Reserve to place a cap on the assets of Wells Fargo. The central bank under Janet Yellen
obliged, and current Chair Jerome Powell is upholding the cap. We're, of course, very closely
monitoring Wells Fargo's efforts to fix its widespread and pervasive problems. They represent a serious matter to us
and the firm is required to remediate them. We continue to hold the firm
accountable for its deficiencies with an unprecedented asset cap that will stay
in place until the firm has comprehensively fixed its problems. It was the third largest bank after
JPMorgan and B of A. They're frozen in time while the rest of
their competitors have been able to grow in the low interest rate environment
that existed up until very recently. And you've seen their stock basically
being outpaced by all their big competitors. Unless there are new
scandals to be discovered underneath this sort of third CEO in a row, I
don't think it's likely that they're going to break up the bank. All the same, some members of Congress
keep raising new issues, along with prospects of further regulation. Mr. Scharf, is Wells Fargo too broken to
fix? Chairman Brown, I'm very confident that
we have made changes which will enable us to put all of our historical
problems behind us. The bank says it will take time to work
through these issues. I was brought in to bring about
substantial change at Wells Fargo and we have made tremendous changes. I've also been very clear since the day
I arrived that it was going to take multiple years to make all of the
changes that were necessary so that the company was run in a way that I'd be
proud of. In 2022, Wells Fargo has benefited from
the interest rate hikes coming in at the Federal Reserve. This additional income is offsetting
the bank's spending on legal costs in the scandal. For now, the scandal
lingers as a notorious chapter in the debate over the power of banks in the
U.S. The Fed asset cap is the biggest thing
holding back the stock of Wells Fargo. And the day that the news is
reported that that asset cap will be lifted will be a good day for
shareholders. It was a scandal and arguably the
biggest scandal in banking after the financial crisis. A lot of that angst came up again
because now we were looking at Wells Fargo that was engaging in such
obviously illegal practices.
