WFC Wells Fargo and Company

   By WSJ STAFF 
 

Wells Fargo & Co. Chief Executive John Stumpf took quite a beating when he appeared last week before a Senate committee. Now, it's time for Round 2: He goes before the House Financial Services Committee to talk about his bank's allegedly "widespread illegal" sales practices Thursday.

We're chronciling the hearing as it unfolds, offering a blow-by-blow account and some real-time analysis of the proceedings.

1:18: John Stumpf: Bank teller?

John Stumpf just got asked if he's ever gone "undercover boss" and acted as a teller.

"I'm not trained or permitted to do that," he said.

He did say that he's visited around 1,000 branches over the last five years.

1:18: More on the credit score issue

Rep. Andy Barr (R, Ky.) is also addressing the credit-score concern that's been raised repeatedly.

He said he's concerned that people's credit scores were hurt through no fault of their own and said the bank's unauthorized opening of checking accounts may have resulted in overdraft fees and other charges that "could have very well damaged their credit scores."

1:14: Stumpf's compensation

Mr. Stumpf has made a lot of money over the years after hitting performance goals for his equity grants. He collected $142.49 million between 2011 and 2015 from performance-based stock awards, concluded an analysis by Equilar Inc., a consulting firm that tracks executive-pay practices.

During that period, the CEO's annual bonus totaled $19.1 million.

Ms. Tolstedt, the Wells Fargo executive who retired this week, collected $55.5 million from equity linked to performance plus $6.6 million in bonuses between 2011 and 2015, Equilar reported.

1:07: 'Trust and the faith and the belief in the system'

Rep. Jim Himes, D-Conn., urged Mr. Stumpf not to take refuge in the idea that Wells Fargo's problems were "not material." That determination is about much more than a legal definition, he said - "it's about the trust and the faith and the belief in the system" that the bank's actions have jeopardized. Without trust, he said, a dollar bill is just a piece of paper "with green ink on it."

Mr. Stumpf agreed that "trust is the absolute critical element, and we have a lot of work to do on that."

1:05: Room is emptying out

As the hearing gets into its third hour, many of the top members have left the room. Chairman Hensarling has passed the gavel to Rep. Randy Neugebauer, a subcommittee chairman. Presumably many are eager to leave to get home to focus on their re-election campaigns. Indeed, one congressman explicitly said he had a plane to catch.

12:48: Stumpf on message

No one is going to accuse Mr. Stumpf of being "low-energy."

After nearly three hours of often harsh criticism and pointed questions from Congress, he isn't showing any signs of weariness.

Lawmakers today have been almost uniformly hostile to Mr. Stumpf, but he has remained calm so far even as some have called for him to be fired and criminally investigated. He's largely stayed on message, repeatedly apologizing.

12:46: Concern about credit scores

Rep. Marlin Stutzman (R. Ind.) earlier expressed concern about Wells Fargo customers whose credit scores were dinged as a result of the bank opening unauthorized accounts in their name, echoing concerns raised in last week's Senate Banking Committee hearing. He referenced the roughly two million accounts that were opened, to which Mr. Stumpf suggested the impact would have been isolated to the customers who had the some 565,000 credit cards issued in their name. Mr. Stumpf has said several times during today's hearing that fewer than 25% of the card customers that have been contacted by the bank so far said that they didn't apply or couldn't recall applying for the cards.

12:42: A lot of members of Congress are Wells Fargo customers

One clear thing from this hearing is that many members of Congress are Wells Fargo customers. That makes sense since Wells Fargo has one of the most extensive branch networks of any U.S. bank and has a branch just a few blocks away from the Capitol building in DC. But that personal experience with the bank seems to be fueling their ire. Rep. Stutzman, a customer, complained a few minutes ago about Wells Fargo's website.

12:40: Stumpf on Dodd-Frank and financial regulation

Rep. Gwen Moore's final question was whether John Stumpf has said that Dodd-Frank "over-regulates" banks. He denied having said that.

She was most likely referring to some remarks Mr. Stumpf made at the national Press Club in September of 2014. In those remarks Stumpf offered qualified criticism and praise of post-financial crisis regulation.

"I think first of all, I'm in favor of good regulation. I want good, honorable competitors doing the right thing. That helps us. But I want to make sure we don't go overboard," Mr. Stumpf said.

He went on to note how much new regulation had been created.

"Now, where there is a disagreement is has enough been done to deal with this issue through Dodd-Frank and other things? And sometimes, one forgets how much has been done. So if I look back to 2008, we now have almost 14,000 pages of new rules written," he said.

He did, however, go on to defend the regulations. "Any one of these things I just talked about, whether it be enhanced requirements, different regulators, living wills, capital liquidity, all make sense in the singular. And in the aggregate, it's a large load. And my answer to critics would be give this stuff a chance to work," Mr. Stumpf said.

That was immediately qualified by a warning about over-regulation: "And by the way, there is an economic price, the economy does pay, if you are going to have over-regulation and too much capital and too much liquidity on the sidelines."

12:40: 'You can't fully regulate bad actors'

Mick Mulvaney of South Carolina follows on the comments from fellow Republican Frank Lucas, saying that the bank's actions "essentially validate" critics of the banking industry from the other side of the aisle. He tells the Democrats in the room that he knows they'll use this episode to "bang the drum for more regulation." Wells Fargo has damaged "the market," he says.

But he counters with this: New regulations were in place while some of this activity was taking place. "You can't fully regulate bad actors," he says.

To Wells Fargo's CEO, he says: "Ya'all were rotten." Mr. Stumpf "wouldn't even be here if I was on the board of that company."

12:30: Not everyone is all that upset with Wells Fargo

It seems not everyone is all that upset with Mr. Stumpf. "I'm so happy you drained the swamp" of the 5,300 "low-level employees," said Rep. Gwen Moore (D., Wisc.). She also said she was "sorry" for Mr. Stump's "loss of $41 million" that was clawed back. She spent some of her time reminiscing about her memories of Wells Fargo's old marketing campaign as well. "I remember Wells Fargo in the old wagon train days," she said. Wells Fargo is "one of the greatest companies this country has ever known," she added.

Towards the end Ms. Moore asked about what relief her constituents would receive and asked what remedies there would be for any whistleblowers who may have lost their jobs," but not the 5300 "bad ones."

12:24: More information on when Stumpf knew of the problems

One of the key questions that lawmakers are hot on was when exactly Mr. Stumpf learned about the problem in the bank's retail business.

At the Senate hearing, Mr. Stumpf had left the timing vague by simply saying it was "later in 2013." Answering a question from Rep. Michael Fitzpatrick (R., Penn.), Mr. Stumpf today said he learned about it in the "fall time frame" of 2013, and before the Los Angeles Times carried a detailed report on the case in December. That article, Mr. Stump said "didn't surprise me because I had heard the acceleration of problems" in certain markets.

Lawmakers had wondered previously whether Mr. Stumpf had been left in the dark until the newspaper article emerged.

12:14: Were the fired Wells employees victims too?

While Wells Fargo's actions have united Democrats and Republicans on two financial-services committees this month, there's some divide over the 5,300 employees who got fired for cross-selling abuses such as moving customers' money to new accounts without their knowledge.

Mr. Stumpf has consistently excoriated these lower level employees and mid-level managers, saying they have no place at the company he runs. But others suggest they may be more like victims of an aggressive sales culture run amok.

"These were people trying to make a living," said Rep. Al Green (D-Texas). "These people deserve a fair day, not just an exit from your company… They deserve an opportunity to be heard."

12:11: Elizabeth Warren just became a verb

In a nod to how contentious Mr. Stumpf's appearances have been on the Hill these past two weeks, Rep. Emanuel Cleaver (D., Mo.) used a quieter, calmer tone when he asked his questions. "I'm not going to Warren you," he said, referring to the blistering exchange Mr. Stumpf had with Sen. Elizabeth Warren last week.

12:09: Other banks have embraced cross selling

A major question since the Wells Fargo penalty earlier this month is whether other banks will get penalized for similar practices. Some lawmakers have mentioned this in today's hearing. While Wells Fargo has been seen as one of the best banks at cross-selling, earlier this month we wrote about how other banks have embraced the practice more in recent years.

When Mr. Stumpf was asked at the hearing whether other banks cross-sold he said "I don't know their situations."

12:07: Buffett report denied on CNBC

As the hearing is ongoing, CNBC's Becky Quick is reporting that Warren Buffett's office denied an earlier news report that he'd been sounding off on Wells Fargo to the bank's board.

Mr. Buffett's Berkshire Hathaway is by far the largest shareholder in the bank, but has not spoken publicly about these sales issues. He's said he won't speak up until November.

Investor Douglas Kass of Seabreeze Partners, who has at times said he is selling shares of Berkshire short, wrote in a blog post that Mr. Buffett had expressed dissatisfaction to the bank's board but committed to remaining a shareholder. The denial of the report was broad, but Ms. Quick said she interpreted it to mean Mr. Buffett had not yet weighed in with the board.

12:03: Wells Fargo hearing sending chills down Wall Street spines

John Stumpf is pretty well-liked by top bankers, including some of the senior executives at rival giant banks. But they can't like what they are hearing today.

Several House members have called for a broader investigation that would bring in other banking chiefs to testify to the committee. Despite the fact that they may say they "welcome to opportunity to testify" before Congress, most would prefer to avoid it.

"This is sending chills down a lot of spines on Wall Street," one senior banker just told me over email.

11:56: Scott to Stumpf: 'You should be downright ashamed of yourself'

One good example of the pitchfork attack on Mr. Stumpf came from David Scott, a Democrat from Georgia. Here is what he said.

"You should be downright ashamed of yourself. You should apologize, right now, if you have any strain of respect for the people of the United States, for the customers that you have defrauded with this, for the rancid example that you are setting, the damage being done to the entire banking industry, because you know what? All of this cross selling, you have caused an extraordinary spot light on" the entire banking industry.

Mr. Scott ended his session with this question: "Do you think what you did was criminal?" Mr. Stumpf said he led the bank with "courage" and didn't break ethics.

11:52: Legal scrutiny is far from over

Beyond lawmakers' bluster, the most important theme of the hearing so far seems to be that Wells Fargo is far from through with its legal scrutiny of the accounts in question. Reps. have proposed at least eight laws that Wells Fargo may allegedly be in violation of.

Among them: the Truth in Savings Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002.

They also gave new details of their own intensifying investigation of the accounts.

11:49: Stumpf maintains fake accounts are 'absolutely immaterial'

Back to the issue of whether the bank's problems were "material": Rep. Ed Royce, R-Calif., noted that Wells Fargo touted how many products it was selling per existing customer, and he said those numbers were "clearly inflated" by fake accounts and help boost the bank's stock price. "If you know fake accounts are going into that ratio, why would you keep reporting that ratio?" he asked. The matter "certainly is material."

Mr. Stumpf stuck to his guns, saying that the fake accounts had only a tiny impact on its product-per-customer numbers. "It's absolutely immaterial."

11:48: Harming capitalism itself?

Rep. Frank Lucas, a Republican from Oklahoma, lectures Mr. Stumpf about the impact of the scandal. Wells Fargo, he says, may have damaged capitalism itself with its actions, undermining those who believe a free market shouldn't be choked off by overregulation.

Whatever the legal outcome, whatever the board does, "you've just made it really hard for those of us who want to maintain that concept of a market economy," Rep. Lucas says. "The brush with which you have been painted" will hurt other banks too, he says. "It's just very unfortunate"

Stumpf responds: "I know right from wrong. I know we have a lot of wrongs to right here," but "we have a culture based on ethics."

"I stand with the people [at the bank] who are doing the right thing," he says.

Concludes Rep. Lucas: "A disservice has been done to them."

11:40: Wells Fargo shares are the worst performing big bank stock this year

Wells Fargo stock is down slightly this morning while most of its big banking rivals have slight gains. Right now Wells Fargo is down around 0.65% while the KBW Bank Index is up 0.32%.

Year-to-date, however, shares of Wells Fargo are down 17.19%, making it the worse performing big bank stock. The KBW index is down just 2.83%.

Much of that decline is clearly tied to the scandal over fake accounts. Month-to-date, the shares of Wells Fargo are off 11.44%.

11:32: Capuano to Stumpf: 'Why shouldn't you be in jail?'

The lawmakers at today's hearing are at their last public appearance before the November election. That may explain why they've taken the outrage over Wells' sales practices up a few notches from last week's combative Senate hearing.

Rep. Capuano displayed a printed photo of an alleged Wells Fargo bank robber and compared Mr. Stumpf to him. "Why shouldn't you be in jail?" he asks. "When prosecutors get hold of you, you are going to have a lot of fun."

Democrat Stephen Lynch also piles on: "Mail fraud, securities fraud, you've done it all," he says.

11:29: 'True bipartisanship' brought to Congress

Rep. Michael Capuano (D., Mass.) noted how Democrats and Republicans had banded together to bash Wells Fargo: "I want to thank you…You have brought true bipartisanship" to the committee, he said. "We're all together on this!"

His comments are a repeat of a line Sen. Jon Tester used when Mr. Stumpf testified before the Senate Banking Committee last week. "You have managed to unite this committee, and not in a good way," Mr. Tester said at the time.

11:27: Losing money on the accounts in question

Mr. Stumpf said that it cost the bank $10 million to open and close the accounts in question, implying that the bank actually lost money on the accounts, as it's said it made just $2.6 million in unwarranted fees from the accounts.

11:26: Should Wells Fargo have told investors about its problems sooner?

Stumpf keeps contending the bank's problems were "not material," but as we report here, it's not as simple as just saying that the problem accounts were only a tiny part of the bank's business.

11:20: Where the CFPB fine goes

The $100 million fine paid to the CFPB by Wells Fargo won't be used to compensate customers; the bank will issue them refunds separately. The fine will be deposited into the CFPB's Civil Penalty Fund, a pool of money that can be used for consumer education and financial-literacy programs, as well as to compensate victims in other cases who haven't received full compensation for harm done to them

11:11: 'There's so much blame to go around for this, it's unbelievable'

Rep. Blaine Luetkemeyer (R., Mo.) didn't give Mr. Stumpf a pass, but he also went hard on regulators for not attacking the issues at Wells Fargo sooner, given that some of the issues came to light as early as 2013. "Regulators need to be fined as well," he said. "There's so much blame to go around for this, it's unbelievable."

11:05: Stumpf flew commercial

Mr. Stumpf appears to have flown commercial to the hearings today and last week. Rep. Sherman from California asked Mr. Stumpf what airline he flew in on, possibly to catch that he came in on a private plane. But Mr. Stumpf says he traveled on Virgin America and United. While bank executives often fly private, executives have come under fire for flying such jets to hearings in Washington.

11:04: Will other big bank CEOs face the same grilling?

Now comes a call to haul the chiefs of the other big banks in front of Congress to talk about the practice of cross-selling additional products to existing customers.

Democrat Brad Sherman says that he wants to know if the "cross-selling mania" at Wells Fargo also occurred at the likes of Bank of America and Citigroup.

"I don't think you should be alone in this joyous experience," he says.

He also points out that Wells Fargo is attempting to resolve these issues with customers through mediation instead of the court system, an effort that he says will deny them "they're day in court."

He ends by saying its time to break up big banks.

10:58: Did Wells Fargo have sales quotas or sales goals?

Mr. Stumpf says that Wells Fargo did not have sales quotas but only goals.

At least some employees appear to have been under the impression that there were hard quotas and that they could lose their jobs for not meeting them.

In a December 1, 2014 anonymous entry on the website Glassdoor.com, someone who claimed to have been working for Wells Fargo for more than 5 years wrote:

"Cross Selling is the only focus now, firing employees who are great at their job in every area that should matter but if the cross selling results are not meeting the ever ridiculous quota (which continues to rise) than you may not have a job next month. Expectation for customers to say yes to cross selling, leaving you with no real control of your job security. Stress!"

In his testimony, Mr. Stumpf said, "My understanding is that people should not be terminated for not meeting sales goals."

The Glassdoor,com entry ends with this advice to management: "Cross sell expectations are going to destroy the customers experience after all tenured employees are fired. All that will be left are employees that cross sell and could not resolve a true complex issue."

10:57: Is the small business division free from sales abuse?

On the small business front: Stumpf doesn't exactly give confidence that Wells Fargo's small business division is free from sales abuse problems. When Rep. Nydia Velazquez (D-NY) asks point blank whether any problems extended to that unit, Mr. Stumpf said he'd have his staff get in touch with her staff. Rep. Velazquez responded that she'd be writing to the U.S. Small Business Administration to urge them to investigate the matter.

10:55: New incentive program by Jan. 1

Mr. Stumpf said the bank is rolling out a new incentive compensation program by "the first of the year." The bank has made tweaks to its incentive compensation program over the years as it found out about the questionable sales tactics, but it didn't seem to make enough of an impact given that the behavior continued.

10:51: McHenry: Stumpf is 'tone deaf'

As expected, both Republicans and Democrats are being very tough on Mr. Stumpf, as was the case at last week's Senate hearing. Republicans committee members have already suggested more investigations, a potential split of the Chairman and CEO roles and slammed Wells Fargo's corporate culture.

Patrick McHenry, the Republican vice chair of the committee, repeatedly grilled Mr. Stumpf on at cultre. After Mr. Stumpf responded that the culture at the bank was "strong," Mr. McHenry hit back at him for being "tone deaf" and how he he didn't grasp the impact a scandal like this could have on societal trust of the banking system.

10:50: Mr. Stumpf is thanking everyone

Mr. Stumpf sure is polite: No matter how confrontational the question, Mr. Stumpf is thanking each questioner on the House Financial Services Committee, even those who have suggested he may have been insider trading (Rep. Maloney) or just ethically corrupt in general (Rep. McHenry). Can't tell yet whether viewers will think its polite or disingenuous.

10:45: Stocks sales by Stumpf

Rep. Carolyn Maloney (D., NY) questioned Mr. Stumpf about the sales of $13 million worth of Wells share by Mr. Stump that took place on Oct. 30, 2013 - close to the timing that Mr. Stumpf said he was made aware of the issues: late 2013.

"My question was did you dump the stock after you found out about the fraudulent accounts," Ms. Maloney said. "Because it seems the timing is very very suspicious and raises a very serious question." Mr. Stumpf said he had "no views" about sales practices related to the sale of the shares.

Mr. Stumpf also said that his sale received the "proper approvals" and that he holds more than four times as many shares as required.

10:41: Honing in on internal whistleblower reports

Members of Congress appear to be honing in on internal whistleblower reports about the sales practices at Wells Fargo that occurred a number of years ago. That's led Mr. Stumpf to provide some new details on how and when executives and the board got summaries of calls to ethics hotlines.

10:40: Stumpf maintains issues were 'not material'

Stumpf continues to maintain that the bank's problems were "not material" enough to require disclosure before the $185 million settlement. As recently as the bank's second-quarter report to the SEC, which was filed Aug. 3, "the facts and circumstances, we believe, were not material."

10:39: Question on separating chairman and CEO roles

Mr. Stumpf is asked about whether Wells should separate the chairman and CEO roles. He holds both positions.

"I believe we have the right structure," he says, but adds that he serves "at the will of the board."

A follow-up question elicits the news that some members of the board heard "high-level" reports of potential sales issues in 2011. In 2013, Mr. Stumpf said he realized there was a real "issue" in the Southwestern U.S.

And in 2014, "we started to provide more information to more committees of the board."

10:36: Fed found flaws in Wells Fargo's incentive pay and sales quotas in 2011

Here's the Federal Reserve press release announcing the 2011 consent order and $85 million fine that is getting so much attention this morning.

Some of the problems alleged by the Fed do indeed sound familiar:

"The order also addresses separate allegations that Wells Fargo Financial sales personnel falsified information about borrowers' incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.

These practices were allegedly fostered by Wells Fargo Financial's incentive compensation and sales quota programs and the lack of adequate controls to manage the risks resulting from these programs."

10:33: Aware earlier than 2013

Chairman Hensarling and Ranking Member Maxine Waters both suggested Mr. Stumpf was aware of issues in the bank's sales business earlier than late 2013, the period in which he said he was made aware of such issues. Ms. Waters pointed out Mr. Stumpf instructed an update in an employee manual for the community banking division, reminding employees they needed to obtain customer's consent before opening an account.

10:30: Warnings from 2008?

Ms. Waters is on the clock. She says that there's evidence that employees called the company's ethics hotline as early as 2008 to report "fraud." She's hitting the same point that Mr. Stumpf and top executives should have understood the scope of the problem faster, and acted to stop it.

"Mistakes are going to happen," Mr. Stumpf says, and it wasn't until 2013 that he became aware that the problem had been "growing."

10:27: 'Someone needs to be held accountable'

Rep. Hensarling says that "no one seems to be held accountable" for the sales scandal at the bank. This echoes what many other lawmakers have said in the wake of the large clawback of Mr. Stumpf's pay: that the move was a step in the right direction but more needs to be done.

"Someone needs to be held accountable," he concludes.

10:24: Specifics about fired managers

Under questioning from Mr. Hensarling, Mr. Stumpf said that "10% or more" of the 5,300 employees fired over five years were branch managers, the first time the bank has given more specifics about the number of managers fired. He added that the bank is doing a full review of "other control functions" in the company. That could include people working in risk, compliance or legal, for example.

10:16: Hensarling: I wish I didn't have a mortgage with Wells Fargo

In concluding his opening remarks, chairman Jeb Hensarling delivered perhaps his harshest condemnation of the bank so far.

"Mr. Stumpf, I regrettably have a mortgage with your bank. I wish I didn't," Mr. Hensarling said. "If I was in the position to pay it off I would because you have broken my trust and you have broken the trust of millions of others. And it will be a long, long time to earn that back."

This raises the possibility that the fall out from Wells Fargo's troubles could extend further than trouble with regulators and lawmakers to include customer exits. Yesterday, California's Treasurer said the state was suspending some of the business it does with the San Francisco based bank.

10:16: Stumpf is sworn in

Stumpf has been sworn in. He will read a version of his written remarks. He starts by repeating that he is "deeply sorry" and "fully accountable" for the sales practices. "We should have done more sooner," he says.

He appears to be wearing a different, darker brace on his right hand than the bandage he worse last week. The bank said he hurt his hand playing with his grandchildren.

(END) Dow Jones Newswires

September 29, 2016 13:47 ET (17:47 GMT)

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