The year was 2008. American financial institution Wells Fargo was peculiarly against all odds, trying hard to weather the volatile year of the economy’s crisis. It was during these strenuous contemporaries that the company’s then-CEO John Stumpf became the embodiment of a savior.
In the year when businesses were mired in the rhetoric of continued fallouts and complex agendas, the bureaucracy at Wells Fargo was taking the bull by its horns and cloaking their bread-and-butter banking under the garb of the transformative acquisition of Wachovia. Stumpf’s shrewd and unscathed earnestness led to the purchase and made Wells the third-largest (by assets worth $1.5 trillion) and one of the most valuable banks in the United States.
In 2013, Stumpf was named “Banker of the year”. But in the same year, once considered the largest employer amongst banks, Wells Fargo was surfacing in the news for controversies, scandals and frauds. Where did Stumpf’s decisions contradict the company’s well-being?
This is a feature of one such gentleman whose ineptitude damaged the culture of a grounded company, left its reputation in tatters and taught valuable lessons on what not to be as the leader of a company.
Welcoming John Stumpf As CEO
When Stumpf was appointed in 2007, the bank’s affinity for expectations was heightened. After all, an individual with a long-standing loyalty of 33 years succeeded in the league of C-Suite and people’s trust in his worthiness did not know any bounds.
Wells’ business banking operations head, Carrie Tolstedt considered her CEO to be a ‘master modeler of values and visions’ while Stumpf narrated his role to be an important one.
“If I have one job here, it’s to be the keeper of the culture.”
Executives at Wells Fargo could not envision the company undergoing a convoluted leadership transition due to Stumpf’s courteous and value-centric nature. He could get a little testy but there would never be a temper loss as per executive Callahan. Under the gleaming yet subtle showmanship, Stumpf reveled his humble office.
His predecessor Kovacevich called the CEO succession a “seven-year planning process” where no single person could run the institution because it always took a team.
Stumpf’s commitment to Wells’ goals for brokerage, wealth management and staying on the forefront of helping people transition to digital banking, got the bank to punch above its weight. There was also the mortgage business, which was courting controversies as well as success.
“Everybody is in the deposit business, but not in the mortgage business.”
Even the most mundane aspects of banking showcased Stumpf’s remnants of a sincere and conscious upbringing and added to his extensive enthusiasm for the company’s work week, beckoning the interest of Wells Fargo’s biggest shareholder, Warren Buffett.
Reigning Supreme With Lucrative Strategies
Stumpf’s specialty was pulling off bank mergers successfully. While he came to Wells via the Norwest takeover in 1998, Stumpf rose in ranks to be involved in nearly 120 bank deals that structured the company into what it is today.
The corridors of power at Wells broke up the government-arranged alliance between Citigroup and Wachovia when they scuttled with a $15.4 billion takeover offer in October 2008.
Wachovia was the largest and most complex merger which shoved Stumpf into the limelight, and not without a handsome reward of $22.9 million.
Wells was a big bank least tarnished by the reputational crisis, having avoided the implosion following Bank of America or the regulatory duress of JP Morgan Chase or the securitization fallout that was nearly fatal to Citigroup.
During the financial predicament of 2008, the bank was languishing between the downfall of home lending and the ripples of the foreclosure crisis.
Homeowners ceased to refinance their mortgages hurting Wells with a $1.2 billion year-over-year drop in income.
Recognizing the uneasy concerns arising about Wells’ feverish pursuit and sole reliance on the colossal home-lending mortgages, Stumpf reassured investors by disclosing futuristic plans of securing the bank’s foothold in investment banking, credit card operations and wealth management.
Amidst Frauds And Raging Controversies
The dawn of Wells Fargo was in 1852 and the 171-year-old company had paraded a stellar reputation until the last few years – it was not bereft of scandals.
For all the emphasis on community-mindedness, Stumpf earned the ire of struggling homeowners and community advocates for the bank’s way of handling foreclosure-related complaints and for its alleged discrimination against minority borrowers.
Non-profit housing counselors echoed this criticism and named Wells Fargo as the most intractable amongst the biggest mortgage servicers, according to a report by California Reinvestment Coalition.
“They rarely acknowledge responsibility. We want to see people not losing their homes unnecessarily and for Wells to be a part of the solution, rather than a problem.”
Stumpf dismissed these protests, but this did not reconcile with the bank’s self-image of a moral values-based company.
Under the hallowed principles of Stumpf, Wells’ employees were pressured to aggressively cross-sell their products, indicating if a customer had a savings account, they would be offered credit cards, in an attempt to enhance revenue. Beleaguered to meet daunting sales goals, employees at Wells Fargo resorted to creating over 2 million fraudulent accounts under their customers’ alias.
Between 2011 and 2016, bank personnel applied for over 565,000 unauthorized credit cards. Then, the bank began charging the unsuspecting customers with late payments and overdraft fees, which were automatically transferred from their accounts. Employees used their own contact information on forms and practiced ‘pinning’ where the customers’ PIN was set to 0000, to benefit control over client accounts and keep them in the dark. Wells Fargo ‘unlawfully’ blocked nearly 1 million customers from accessing their funds, by freezing their accounts for nearly two weeks.
These employees were driven by the urge to retain their livelihood because non-compliance with the lofty sales goals would lead to termination.
In 2014, Wells endeavored to curb fraudulent activities by conducting an ethics workshop that warned employees of the consequences. In a feeble effort to disassociate from the swindling, Wells also modified its compensation structure to take the edge off sales goals. With a no-good ethics hotline, former employees claimed their managers’ awareness of the same.
“An entire generation of managers thrived in the fraudulent culture, got rewarded and were in positions of power.”
– Jonathan Delshad, a lawyer defending former employees.
Consequences And Repercussions
The fraud came to light in 2013 when an avalanche of customer grievances related to unauthorized fees drew the attention of regulatory agencies. At the peak of the scandal, countless probes and congressional hearings were triggered and CEO Stumpf was forced to resign by 2016.
Nearly 5,300 duplicitous employees were relieved of their services but not sans their distaste for the deception they were coerced into performing. Former employees described their tenure at Wells Fargo as a ‘grind-house’, ‘the lowest point of my life’ and a plight when anti-anxiety pills became habitual.
“It was a tough economy and I was worried that if I lost the job, my financial situation would worsen.”
In 2016, Federal regulators slapped a fine of $185 million on Wells Fargo, igniting uproar against Stumpf’s banking ethics and financial misdeeds. Before resigning, Stumpf tried to shift the blame to lower-level employees, not acknowledging the culture that blossomed under his leadership.
The San-Francisco-based bank was ordered to pay a staggering $3.7 billion in totality (till December 2022) to settle the reprehensible accusations, civil-criminal probes and customer remediation. The penalty would be allocated between the Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) to offer restitution to deceived customers.
The Consumer Financial Protection Bureau (CFPB) reiterated the widespread mismanagement and misconduct of Wells Fargo which harmed over 16 million accounts. CFPB ordered the largest-ever civil penalty to compensate defrauded customers for Wells’ range of illegal activities which included repeatedly misapplying loan payments, repossessing vehicles illegally, charging surprise overdraft fees incorrectly and wrongly foreclosing on homes.
CFPB’s director, Rohit Chopra termed Wells’ unstoppable cycle of violating laws as a ‘corporate recidivist’.
“The bank was aware of the problems for years before addressing the issue.”
– CFPB
Insinuating further penalties, Chopra said that the regulators had to consider whether additional limitations had to be placed beyond the unprecedented asset cap imposed in 2018. Apart from that, Wells’ denied thousands of mortgage loan modifications which caused customers to lose homes through wrongful foreclosures.
Senator Elizabeth Warren lauded the CFPB’s penalties and chose Chopra’s example to demonstrate protection to regulators.
“The fine imposed is the much-needed accountability after Wells repeatedly offended customers.”
– Warren
Nearly a decade after the allegations, Wells Fargo is still repenting for its crimes in the form of bewildering losses. The fourth CEO since the fall of 2016, Charles Scharf acknowledged the resonant toll of the scandal on the bank’s bottom line.
What To Learn Not To Do From John Stumpf
An important lesson to learn – The utmost priority of a CEO should always be to safeguard the company’s reputation, not wildly chase monetary gains.
The ramifications of one leader’s actions can prove to be cataclysmic for the company, in the long run. The decisions and practices that Stumpf allowed are profound on Wells Fargo’s reputation, even today. Reputation is the single biggest asset of any business realm and should not be bartered at the expense of momentary triumphs. Never let your greed or your employee’s behavior ever hamper the proliferation of your company.