An unprecedented consent order from the Federal Reserve against Wells Fargo & Co. for its opening of millions of phony accounts is "manageable," Wells Fargo CEO and President Timothy Sloan said Feb. 2, adding that the company will work hard to meet the Fed's requirements "as quickly as possible."
The Fed — in the closing hours of Janet Yellen's term as Fed chair — issued a cease and desist order against Wells over what it called "widespread consumer abuses and other compliance breakdowns." Under the consent order, Wells is restricted from growing its total consolidated assets beyond the level it reported at the end of 2017, until the Fed is satisfied that Wells has improved its governance and controls. Fed officials say they have never limited an entire firm's asset size under an enforcement action.
The company is considering reducing some of its portfolios — such as nonoperational deposits, financial institutions' deposits and trading assets — so it has room to grow traditional loans and deposits. On a conference call, Sloan described those as "meaningful levers we can pull." It expects managing the balance sheet in this way will reduce its 2018 net income by $300 million to $400 million.
The Fed's order is a significant blow to Wells in the fallout from the September 2016 revelations that it had opened millions of unauthorized accounts. In the 16 months since, it has changed its chairman, CEO and other high-level executives. It also revealed the amount of unauthorized accounts was larger than previously estimated.
Sloan, who took over as CEO after news of the scandal popped up, said the Fed action was not related to any new matters and highlighted the "strong progress" Wells has already made in improving its governance and risk management. But he said Fed officials believe "there is more work that needs to be done, and we agree."
"We want to have this cap lifted as soon as possible, and we're going to work very hard to ensure that's the case," Sloan said.
Under the consent order, Wells' board needs to submit a plan within 60 days on how it would improve its oversight functions, and the company needs to submit a plan on improving its compliance and risk management processes.
The company also needs to contract with an independent third party to ensure that those plans were implemented. The review must be completed by Sept. 30.
The Fed would remove the cap on Wells' growth if it is satisfied by the review. A second review would then take place to ensure Wells' risk management improvements are working and are sustainable.
The Fed's Board of Governors voted 3-0 on the action, with Yellen, Fed Governor Lael Brainard and Fed Governor Jerome Powell, who is set to take over as Fed chair on Feb. 3, approving it. Randal Quarles, the Fed's vice chairman for supervision, has recused himself from any decisions related to Wells Fargo.
The Fed also said in a news release that "concurrently" with its action, Wells is replacing three board members by April and a fourth by the end of 2018. Arati Randolph, a Wells spokeswoman, said the company was not providing more details yet on who would leave the Wells board.
Sen. Elizabeth Warren, D-Mass., noted in a news release that she had repeatedly pushed Yellen to push out board members who were around before the scandal.
"Today she did it — in her last act as Fed Chair," Warren said in a news release. "Fines alone will never rein in fraudulent behavior at the big banks and by pushing out Board Members at Wells Fargo, Chair Yellen sends a strong message. Her decision today demonstrates that we have the tools to rein in Wall Street — if our regulators have the guts to use them."
She also said Jerome Powell, who is set to take over as the new Fed chair on Feb. 3, will have to "show the same kind of courage" or be responsible for the next financial crisis.
On the conference call, Sloan said Wells has a "very constructive relationship" with the Fed and is in conversations with the agency every day. He said he appreciated that the Fed pointed out in the order that Wells has cooperated with the Board of Governors and the San Francisco Fed.
