Case Study: Lessons from Wells Fargo

Sept. 14, 2009

The shining halo over Wells Fargo – a successful company despite the economic downturn – appears much dimmer as the result of its recent behavior. Wells Fargo is rapidly becoming a negative case study for banks and businesses in all sectors.

Considering the bank’s stellar reputation and expertise, its apparent lack of sensitivity is rather perplexing.

First, it was an appalling sense of corporate entitlement and disregard of investor angst over Wells Fargo’s reluctance to be transparent. Then, came the Los Angeles Times report that one of the bank’s senior vice presidents partied lavishly at a beachfront home the bank took back from a borrower in swank Malibu, CA.

If Wells Fargo does not reverse its course on these fronts, the bank will suffer from unintended consequences. The bank’s behavior is not what we anticipate from such a high-quality institution.

First, let us consider the bank’s shortcomings on transparency:

On Sept. 3, The Wall Street Journal reported the bank’s shares were on a roller coaster ride because of a lack of transparency with investors. The report said Wells Fargo’s 2009 share price was down 11 percent while others in the financial sector were up – shares at Bank of America and J.P. Morgan rose 17 percent and 31 percent, respectively.

Here are the three Wall Street transparency issues:

1. The published report asserted Wells Fargo – unlike other large banks – will not disclose its earnings in a quarterly conference call.
2. Nor will the bank publicize its tangible book value per share (TBVPS). Basically, TBVPS is what common shareholders will get if the bank should go into bankruptcy. That is considered a fair question for investors to pose in the wake of the recent financial disasters.
3. Nor will Wells Fargo disclose the status of the distressed loans from its purchase of Wachovia.

Beachfront Partying

On Friday, Sept. 12, the Los Angeles Times reported Cheronda Guyton – who is the bank’s senior vice president in charge of foreclosed commercial properties – staged extravagant parties at a beachfront Malibu house owned by the bank. At one party, the report indicated the guests arrived on a yacht.

The report lit another fuse: The explosive issue stemming from the unrestrained behavior by financial firms that received those massive government bailouts.

In February, after collecting $25 billion from taxpayers in TARP bailout money, it came to light that Wells Fargo scheduled an over-the-top employee recognition event in Las Vegas – complete with all the lavish trimmings – lodging and all expenses paid for multiple nights at expensive hotels. Only after negative publicity did Wells Fargo cancel the junket.

Plus, in August, the bank announced its four top executives would receive mega increases in pay. CEO John Stumpf’s paycheck skyrocketed from $900,000 to more than $5 million.

The Malibu partying ignited another firestorm: A bank employee was throwing lavish parties in a home surrendered by the owners while millions of Americans face foreclosure and their mortgage problems are destroying their credit ratings.

Ostensibly, Malibu residents blew the whistle. Their former neighbors were the owners who lost their home because their finances were devastated by the Bernard Madoff massive Ponzi scheme. It was also revealed that after Wells Fargo retook the elegant home, it did not list it for sale and refused to show it to prospective buyers. That is an unfortunate precedent from the perspective of shareholders and customers.

It is also a public relations eyesore that published reports indicate Wells Fargo is too slow – one of the slowest banks – in modifying the troubled mortgages in President Obama’s $75 billion foreclosure prevention plan.

Turning it Around

Here is my sense of what Wells Fargo must do to reclaim its once-prestigious legacy:

In addition to the foreclosure dilemma, first, the bank needs to be sensitive to what is taking place in America, and behave accordingly.

The real unemployment rate is about 18 percent. That includes Americans who are receiving unemployment benefits, those who cannot find a job and their unemployment checks have ended, and those forced to work part time or freelance because of a lack of jobs.

An incident involving Wal-Mart reminded me of when I have recommended to clients to schedule their advertising every two weeks – just before the first and fifteenth of each month.

Wal-Mart CEO Mike Duke was quoted as telling the Goldman Sachs 16^th Annual Global Retail Conference that most shoppers – not just low-income – are financially stressed. He said Wal-Mart sales are increasingly bigger during paycheck cycles, especially just after midnight on the first of each month.

Next, Wells Fargo needs to be sensitive to shareholders and customers. The bank should develop a culture where it demonstrates a concern and sensitivity about mortgagees. The management’s attitude of corporate entitlement in their appearances and excesses should cease and desist. Stop planning junkets to Las Vegas.

The bank needs to understand the let-it-begin-with-me concept.

Here is how:

If they want a higher share price, they need to communicate with investors as though they care about transparency, as if to reassure investors that Wells Fargo is a good investment.

If they want to attract the best customers, they need to demonstrate customer empathy and a caring attitude about deposits and loans.

And if the allegations about the Malibu parties are accurate, the bank needs to set an example with its senior vice president. But if the bank’s executive had permission to occupy the house and throw lavish parties, everyone should remember the privilege is a taxable benefit or she should pay the market’s rental rate for a luxurious beachfront home.

Certainly, Wells Fargo is not the only firm with senior executives demonstrating an entitlement mentality and behavior. But the bank has an opportunity to wipe the slate clean and reclaim its stellar reputation. Just as the bank undoubtedly penalizes late borrowers, senior management should start demonstrating their awareness that dubious behavior has consequences.

Short of these steps, Wells Fargo will hear from government and will someday suffer the same fate as General Motors. And we’ll all be sorry.