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Reaction mixed on Fed's unprecedented limits for Wells Fargo

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Reaction mixed on Fed's unprecedented limits for Wells Fargo

The Federal Reserve's unprecedented sanctions against Wells Fargo & Co. were a welcome move for some critics who say the Fed was right to take a tough stance on the company, though others think the U.S. central bank may have gone too far in responding to Wells' opening of millions of phony accounts.

The Fed is limiting Wells Fargo's growth until it is satisfied that the company has improved its governance and risk controls, an action that Fed officials say the regulator has never taken. Wells is also replacing four board members by the end of the year, though the move is not required as part of the Fed's consent order.

Bartlett Naylor, financial policy advocate at Public Citizen, said the Fed should have sought to break up Wells Fargo because it is too large to be managed effectively, and he questioned whether it was wise for the Fed to rely on Wells' board to successfully oversee more than 200,000 employees. "I think that is arithmetically impossible," Naylor said.

On the other hand, J.W. Verret, a George Mason University professor and senior scholar at the Mercatus Center Working Group on Financial Markets, questioned whether the Fed's action was appropriate. Verret said Wells has already been hit with substantial fines and that it was a "bad approach" for the Fed to punish shareholders by restricting the company's growth.

A better option, he said, would be the removal of the internal and external auditors who failed to recognize the issues at Wells. The company, for example, stuck with the accounting firm KPMG after the revelations.

"I think that the auditors should face consequences for their failure here," Verret said. "They were the ones who failed to detect the weaknesses and internal controls that allowed this to happen."

A KPMG spokesman declined to comment.

Sen. Chris Van Hollen, D-Md., praised the restrictions on Wells' growth, saying few people were held accountable for the financial crisis and that policymakers "really need to put more teeth into our actions against those people who are violating the public trust."

"I think this is an important action the Fed took," he said in an interview. "For too long, a lot of the worst violators have been treated with kid gloves. It's time to take some real action."

Meanwhile, Sen. Tim Scott, R-S.C., told S&P Global Market Intelligence that he has not fully analyzed the Fed's decision, but that it appears that the Fed "has responded to the challenges that were created through years of poor decision-making."

Terry Jorde, chief of staff and senior executive vice president of the Independent Community Bankers of America, said the Fed's move was a step in the right direction.

Officials at community banks, she said, are rightly "under no illusion" that they would not face major penalties if they fail to spot consumer abuses. But she said regulators have often tolerated mismanagement at the country's largest institutions because they are "too big too manage," adding that the ICBA hopes the Wells action marks the beginning of tougher stances on major institutions.

"With this action, we believe the Fed has made it clear that ignorance is not an excuse," she said.