$1B fallout: Where does Wells go from here?

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The sheer size of the $1 billion penalty against Wells Fargo accounted for the intense media attention that the punishment drew on Friday.

One billion dollars is more than five times as large as the fine imposed on the San Francisco bank at the outset of its regulatory woes in 2016. It is also the largest fine in the nearly seven-year history of the Consumer Financial Protection Bureau.

But perhaps just as notable as the fine’s size is the fact that it is only the start of what Wells will pay as a result of abuses in its auto-lending and mortgage businesses. It is also expected to pay out hundreds of millions of dollars in restitution to consumers.

Moreover, the order revives thorny questions about the bank's leadership, how this latest order interacts with the Federal Reserve's cap on growth and why the order at least partly eases restrictions on Wells rather than toughening them.

Following are four key questions following the order.

What is the future of key leaders at Wells Fargo?

Wells CEO Tim Sloan has a tough job, even by the standards of big bank CEOs, and he has gotten a decent amount of leeway from investors since taking the reins in October 2016. Board chairman Elizabeth “Betsy” Duke has only been in her current position for about four months.

But with each new piece of bad news, the leash shortens for the company’s top brass. In February, the Federal Reserve imposed an asset cap on the bank, an unprecedented step that the bank projects will cost it $300 million-$400 million in profits this year.

The company’s financial results have been sluggish in recent quarters in comparison with its big-bank peers. Still looming in the distance is an ongoing investigation of the bank’s wealth management unit.

“The settlement removes one overhang, but there are still overhangs on when business momentum will return to the company and whether or not additional wrongdoing will be found,” Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, wrote in a research note published Friday.

Some analysts say Friday’s consent orders give both executives more time to deliver results.

But a key problem is that Wells may already be perceived as damaged goods, which makes it harder for Sloan and Duke to rebuild.

The drumbeat of bad news over the past 19 months has already resulted in economic and reputational damage.

"It's painful to say that nobody cares about a $1 billion fine, but the general population's interest in this falls off," said Dr. Nir Kossovsky, the CEO of Steel City Re, a Pittsburgh insurer of reputational risk. "The additional reputational risk isn't that great now, but that also means it's because their reputational value is really low."

Kossovsky defines reputational risk as the peril of economic or political damage from energized, disappointed stakeholders including customers, employees, regulators, creditors, and investors.

"Having been damaged, Wells Fargo really has only one option: to rebuild its reputation," he said. "If stakeholders expect more problems, then will a rational person, given a choice, elect to work for the bank, borrow from the bank, do business with the bank?"

Sloan joined the company 31 years ago, and some investors are questioning whether fresh eyes are needed at the top of the company. Sloan’s pay package — he was paid $17.4 million last year, even though the bank’s stock performance lagged well behind other big banks — is another bone of contention for some investors.

But there is also the question of who might replace Sloan. Even his critics do not see an obvious candidate.

Wells Fargo’s penance: What’s been done, what’s to come
The latest fine from regulators was leveled against the bank on Friday. But it's far from the only penalty it has paid in recent years, and more may be on the way.

Why were compensation restrictions on Wells actually loosened?

At least one part of the order actually eases restrictions on Wells, as opposed to toughening them up. In November 2016, the OCC notified Wells that it would be subject to certain restrictions regarding golden parachute payments and other forms of compensation.

Those restrictions were meant to affect only senior executives, according to a source familiar with the situation. But as the restrictions were written, they applied to virtually every employee who left Wells Fargo, this source said.

In the consent order released on Friday, the compensation restrictions are pared back to apply to members of Wells Fargo’s operating committee, regional bank presidents in the bank’s retail division and certain other high-level employees.

Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, said she was disappointed in the OCC’s decision to loosen existing restrictions on the bank. Waters has suggested that regulators should revoke Wells Fargo’s charter.

“I have been clear in the past that fines are not sufficient in addressing the pattern of illegal behavior by Wells Fargo, and this action does not put the bank’s past behavior to rest,” she said Friday in a written statement. “Steeper penalties are still necessary.”

How does this interact with the Fed's ban on growth at the bank?

Shares in Wells Fargo were up nearly 2% in afternoon trading, despite a broad decline in stock prices, as investors shrugged at the penalty.

The market’s placid response can be attributed in part to the disclosure of the record fine in advance of Friday’s announcement. Also relevant is the fact that a fine, even one with 10 digits, is a hit that Wells Fargo can easily absorb.

The megabank said that it will reduce its reported first-quarter net income by $800 million, but will still record quarterly profits of $4.7 billion.

From the standpoint of the bank and its shareholders, the Fed could pose a bigger problem.

Brian Foran, an analyst at Autonomous Research, noted that there is lingering uncertainty regarding when the Fed will lift its asset cap on Wells Fargo. If that cap remains in place early next year, the bank will likely suffer another significant financial hit, he said.

The Fed also runs the annual stress tests for big banks, and investors are wondering whether the problems that the central bank has identified with the governance and controls at Wells Fargo will result in restrictions this year on the bank’s payouts to shareholders.

“Really, it boils down to the Fed,” Foran said.

What more does Wells have to pay after the penalty?

Half of the $1 billion penalty goes to the Office of the Comptroller of the Currency, which will turn the money over to the Treasury.

The CFPB will put the other $500 million into its civil money penalty fund, where it is not required to go solely to Wells customers, but can be used to reimburse any consumers who have faced harm by financial firms.

Wells has estimated that it will provide $145 million in cash remediation and $37 million in account adjustments to affected auto-loan borrowers, according to a regulatory filing in March.

The payments will go to borrowers who were improperly forced into insurance policies even after they demonstrated that they already had auto insurance.

So far, the bank has mailed checks totaling $11.7 million to 235,000 auto-loan borrowers, numbers that exceed the bar of $10 million and 50,000 customers set in the OCC’s consent order.

Wells also acknowledged that it improperly charged customers fees for extending mortgage interest rate locks even if the bank’s actions had resulted in the loan’s failure to close in the specified window of time.

The San Francisco bank has not yet determined how many borrowers have been reimbursed and how much money they have received.

In December, Wells started sending checks to customers who complained about the rate-lock fees, or about a delay in the processing of their loans. In March, Wells sent mailings to other customers who paid the fees.

"All they need to do is return a card or give us a call, and we will refund the fee plus interest," said Wells spokesman Tom Goyda.

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