In yesterday's column, I concluded with the observation that the recent Senate hearing represented the last chance for Wells Fargo (WFC) CEO John Stumpf, and the bank, to recapture the level of trust consumers, borrowers, depositors and investors traditionally had with them and that they failed to meet that challenge.
The decision by the banks board of director's late yesterday to claw back bonuses and other compensation from Stumpf and the retiring head of the Community Banking Group, Carrie Tolstedt, does nothing to change that.
It does evidence an awareness of the necessity to show that some definitive actions have been taken before Stumpf meets with the House Financial Services Committee tomorrow, but the limited scope of those actions also indicates that the board is still not aware of the gravity of the situation, which the board itself may be partially responsible for because of previous inaction.
Although the board simultaneously announced that it is launching an "independent investigation" of the company's sales practices, this also serves as a distraction from the need for an independent investigation of the board itself. It's essential to know what they knew and when.
The two organizations capable of ensuring that occurs and/or that it occurs with the resignation of board members are the two largest institutional holders of the bank's equity, Berkshire Hathaway BRK-A, with about a10% stake and Vanguard, Inc., with about 5% stake.
The Chairman of Berkshire, Warren Buffett, and the founder of Vanguard, John Bogle, have long been public advocates of corporate integrity and responsibility to customers. It is highly unlikely, in my opinion, that either organization will refrain from taking an active interest in steering the board toward substantive corrective action.
As these actions take place it is probable that investors will respond positively to them, at least initially, but the real process of changing the corporate culture will take years, as will regaining some portion of the trust lost. That will almost certainly weigh heavily on the bank's ability to perform and meet financial expectations.
Ultimately, the current fraud issue is not an event, it is a symptom of a corporate culture, at the highest levels, that both nurtured a degree of cognitive dissonance by the management team with respect to how sales targets were achieved, and the self-deception necessary to believe that this was being done in accordance with the publicly-stated very high ethical standards advanced by the company's leaders.
In the best-case scenario, the investigation into the sales practices of the division where the known fraud occurred will reveal that the executives in charge acted independently, did not fully apprise senior executives of the magnitude of the issue and in that case provided senior management some degree of plausible deniability.
This would isolate and contain the issue, but it would also raise concerns about the competence of senior managers.
In the worst-case scenario, the investigation will show that senior managers, and perhaps even board members, knew or should have known that the issues were endemic to the division and chose to treat it in such a fashion that would safeguard their personal financial wellbeing.
From what has been disclosed, so far it appears that the latter is probably closer the actuality than the former.
In that case, an entire restructuring of the company's management team will be required and that process could easily result in the company having to focus its attention almost unilaterally on that process, rather than on the actual operation of the business.
This is similar to the situation faced by Bank of America (BAC) in having to deal with legacy issues from the last housing crisis for the past several years, which, ironically, provided Wells with the opportunity to claim dominance of the residential mortgage market unfettered by competition.
If the process unfolds in this fashion, the money center best positioned to exploit Wells' inability to focus on business is JPMorgan Chase (JPM) .
As I wrote about a year ago a column, Morgan has finally moved into the residential mortgage space to challenge Wells' newfound dominance, and has been successful in doing so.
In the past year, that process has continued with Morgan's retained residential mortgage book increasing by about 8.5%, while Wells' grew by about 6%. If that differential continues, even if Wells did not face its current problems, Morgan would replace Wells as the largest residential lender in less than two years.
This is problematic for Wells because the bank is so highly concentrated in that market and is still in the very early stages of trying to diversify into other banking sectors.
That means that Wells is facing the prospect of having to deal with a new management team, creating a new corporate culture and steering in the bank in a new business direction simultaneously.