Paul Meloan – Vested Interest

Wells Fargo customers were wagon-jacked, and it’s time for senior management to pay the price.

Fraud Has Been ‘Business as Usual’ for Wells Fargo

The basis of Wells Fargo’s settlement is truly astonishing. Wells Fargo employees created two million fake accounts to meet management’s incessant demands for more and more “points of contact” with customers. Rank & file workers at Wells’ 6,000 branches were given a clear message from their managers: open more accounts (and thus, drive more fees for the bank) or you’ll be cut loose. Wells Fargo has terminated 5,300 employees implicated in what sounds like the Normandy invasion of identity theft. No senior executives have yet been named as being terminated by the company.

Whatever goodwill Wells Fargo had with retail customers has been shattered for a generation. The bank’s reputation is destroyed, as it should be. Does anyone seriously believe that bank executives were ignorant of these shenanigans? If they were, was it out of a willful ignorance driven by a desire to remain above the fray they created and profited from?

Who Knew, or Should Have Known, About the Fraudulent Activities?

In any corporation the Board of Directors serves as the fiduciary representatives of shareholders. The members of the board are the people to whom management is ultimately responsible. These Directors are who will need to clean house at Wells Fargo after this week’s bombshell announcement. They should start with CEO John Stumpf and senior vice president in charge of community banking Carrie Tolstedt.

Mere weeks ago, Tolstedt retired from Wells. Here is Ms. Tolstedt’s compensation for the past five years:

2015: $9,091,681
2014: $9,518,258
2013: $8,750,403
2012: $8,855,212
2011: $8,703,776

Given Ms. Tolstedt’s position and compensation, it is logical to infer that the only person to whom she reported was Stumpf. Here is Mr. Stumpf’s compensation over the same period:

2015: $19,318,604
2014: $21,426,391
2013: $19,320,409
2012: $22,878,085
2011: $19,847,921

Since our own Department of Justice has no inclination to prosecute crimes committed by large financial institutions, it’s up to the Board to see to it that the people who made all the money take at least some of the responsibility.  How does the Board do that? They could terminate these executives’ employment for cause and they could rescind grants of stock and options. They might even attempt to claw back the bonuses and compensation paid to these two since 2011. Wells shareholders paid these two executives over $147 million in compensation since 2011, the first year of documented mass consumer fraud. The Board has a fiduciary obligation to clean up the damage these two executives have inflicted.

Berkshire Hathaway CEO Warren Buffett Can Choose To Hold Directors and Senior Executives Accountable

If the Board of Directors fails to live up to its responsibility, it may be time for Wells Fargo’s largest shareholder, Berkshire Hathaway, to make good on a promise its famous CEO Warren Buffett made decades ago.

“Lose a shred of reputation for the Firm, and I will be ruthless.”

— Warren Buffett

Back in 1990, a small group of traders at Salomon Brothers attempted to rig auctions of US Treasury debt. When Treasury learned of this, it did not react well. As crazy as this sounds in 2016, someone actually went to jail! Beyond the handful of persons implicated in criminal activity, the Salomon firm’s survival was at risk. In their moment of peril, a white knight came riding across the plains from Omaha, Nebraska to give them exactly what they needed: an injection of moral capital.

Yes, America’s favorite Billionaire Next Door, Warren Buffett, stepped in. He propped up the tarnished Salomon name. He gave them the breathing room they needed to die in peace and with dignity (or as much dignity as can be said of ultimately being bought by Citicorp). Buffett did this by wowing regulators at the Justice Department and in Congress. He assured regulators that they could find law and order east of the Hudson River. Salomon escaped with only paying a monster fine ($280 million was real money back in 1991). They dodged the death penalty that could have befallen them. Buffett saved the hides and personal net worths of many executives at Salomon. His accomplishment was possible in no small part because of the respect he commanded.

The Money Shot of Buffett’s Testimony Before Congress

“Lose a shred of reputation for the Firm, and I will be ruthless.” Keep those words in mind.

If the Wells Fargo Board fails to meet its fiduciary duty then it will be time for Buffett to make good on that promise. Buffett has both the financial position in Wells and the public profile necessary to lead a shareholder revolt.

Buffett usually speaks softly, but in this case he can take a bat to the Wells Fargo Board and management if he chose to do so. If the Board cannot be ruthless when it is necessary, Buffett will need to do it for them.

    Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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