Can Stumpf Turn Things Around in Second D.C. Hearing?

Last week's grueling, nearly three-hour hearing in front of a Senate panel for Wells Fargo Chief Executive John Stumpf may feel like just the warm-up act when he faces the House Financial Services Committee on Thursday.

With each of the 60-plus members of the panel running for reelection, lawmakers are likely to subject Stumpf to tough questioning, raising the stakes for the embattled chairman and CEO after his widely panned performance a week earlier.

Since that time, the situation has only become worse for Stumpf and the bank. Former employees have filed lawsuits claiming they were fired for not meeting sales goals and retaliated against after complaining about the bank's high-pressure sales culture. The Department of Labor, meanwhile, said Wednesday it is opening an investigation into Wells' treatment of employees while the Commodity Futures Trading Commission fined the bank $400,000 over swaps violations.

So far, Wells has failed to hold any senior executive accountable for the widespread fraud, repeatedly pinning the blame on 5,300 former employees who were fired for opening roughly 2 million phony accounts.

Following are four key areas to watch.

Will Wells' decision to claw back pay from execs satisfy lawmakers?

Stumpf's biggest misstep at the Senate Banking Committee hearing last week was when he deferred several times to Wells' board on clawing back some the reported $125 million pay package of Carrie Tolstedt, the community bank executive in charge of retail employees, who was allowed to retire in July.

Several senators hammered Stumpf on the issue.

"You're not willing to say publicly to anyone that some of her compensation, over $100 million when she announced her retirement in the last several weeks, that any of it should be clawed back?" asked Sen. Sherrod Brown, D-Ohio.

But Stumpf refused to give in, arguing it was a decision of the board.

"I don't want in any way to prejudice [the board's] activity and I'm going to accept and respect any decision that they make," he said.

This time around, Stumpf will have a different response. The company announced late Tuesday that Stumpf had agreed to give up $41 million in unvested stock awards and would not receive a bonus for 2016.

Similarly, Tolstedt had agreed to forgo $19 million in unvested equity stock awards and not receive millions of dollars worth of retirement benefits. She, too, will give up her bonus for 2016.

Analysts said the company simply had to claw back pay in the face of such a public backlash.

"There has to be some way to claw back the compensation, which seems unusually excessive and is more like the compensation of a CEO rather than the head of the branch network," said Erik Oja, an analyst at S&P IQ.

The question remains, however, whether the clawbacks will be seen as sufficient for lawmakers. They may argue that Stumpf and Tolstedt should lose more.

Will Stumpf announce senior exec firings related to the fraud?

Lawmakers are expected to press for more details about which executives were responsible for overseeing the employees who forged customer signatures and opened accounts without their knowledge.

Just offering clawbacks is not enough, analysts said.

"If that's all they're considering, they still don't get it," said Paul Miller, a managing director and head of financial institutions research at FBR Capital Markets. "Somebody inside the company must be held responsible, not just the person that just retired. They're not taking any pain. Nobody got fired, nobody has lost any money and nobody has had their salary cut or bonus taken away."

Though Stumpf apologized during the Senate hearing last week, he was still seen as too ready to pin the blame on lower-level employees who, lawmakers noted, were not there to defend themselves. But analysts said Stumpf appeared too dismissive of regulators and the government, an attitude that could prove dangerous if it surfaces again.

"The Senate hearing was unbelievable in terms of the naivete of the CEO," said Mike Mayo, an analyst at CLSA, who wrote in a research note Monday that his firm's support of Stumpf "is now wavering."

Mayo has called for a five-point plan that includes clawing back pay from Tolstedt and Stumpf as well as the firing of the heads of the human resources and corporate responsibility committees of the board of directors.

Stumpf also should offer to do more for customers who were harmed, such as matching the $100 million fine it paid to the CFPB, Mayo said.

"If you're the people's bank, you have to reach out to the people," he said.

Several senators also expressed concern that customers' credit reports were damaged, which might have impacted their ability to get a loan. Stumpf has said Wells will be calling each of the customers affected, but Mayo suggested he do more with a campaign that gave $1,000 to each of the 115, 000 credit card customers who were charged fees.

Will Stumpf provide a fuller explanation of Wells' sales culture and compliance?

Lawmakers are likely to question Stumpf about the bank's culture and how the bank came up with idea of selling eight products to each customer without first determining if the products were appropriate.

This line of reasoning is already playing out on the regulatory side. At last week's hearing, Comptroller of the Currency Thomas Curry said the OCC will conduct a horizontal review of sales practices at the largest banks. Richard Cordray, the CFPB director, said his agency would be "doing a joint action" with the OCC.

Questions also might focus on when Wells' own internal compliance and audit teams identified the unauthorized accounts, which date to 2011, if not further.

The bank has three basic lines of defense to ferret out fraud: the business line, the risk management function and internal audit.

"Somebody was missing in their risk control processes, or maybe there was a gap in their review process, or they didn't deem the unauthorized accounts critical enough," said Cliff Rossi, an academic director and finance professor at the University of Maryland and a former chief risk officer at Citigroup.

Will more lawmakers call for Stumpf to resign?

Arguably Stumpf's worst moment last week was when Sens. Elizabeth Warren, D-Mass., and Jeff Merkley, D-Ore., called on the CEO to resign. Analysts said if such calls continue to grow, Stumpf's position will become more precarious.

"The big question right now is whether Stumpf will keep his job," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "His seat is getting hotter and hotter. It's clear that they are going to need a head to roll."

Analysts said Stumpf is lobbying the board behind the scenes to keep his job. If he is going to do so, he needs to explain what the bank stands for now that its cross-selling culture has been called into question.

"If they don't stand for fraud, identity theft or unauthorized account openings, then what do they stand for, and what does cross-selling stand for?" Mayo said. "He needs to define what Wells Fargo's culture stand for, because if the culture is broken, then John Stumpf has to go."

FBR's Miller said that if the chairman and CEO roles were split, the company would be able to manage the crisis more effectively.

"But Congress is the ultimate regulator," Miller said, "and now Congress is saying these guys are out of control."

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