Wells Fargo Background
Wells Fargo is a multinational company that offers financial services. Its headquarters are in San Francisco in California. Henry Wells and William George Fargo founded the original company. They established the American Express Company first. Later, the two plus other investors established Wells, Fargo & Company with a purpose of handling banking and express business in 1852.The California Gold Rush prompted the idea of the new business. In California, the business handled the sale, transport, and purchase of gold dust, specie, and bullion among other goods which moved by ship from the West to the East coast crossing through Isthmus of Panama overland. Later, the company expanded to the staging business. In 1861, the company operated the Pony Express route specifically the western portion (Wells Fargo, 2018). In 1866, all western stagecoach consolidated under the name of Wells Fargo making the company the largest stagecoaches empire.
The services were offered up to the early 20th century. Henry Wells required that the services were delivered with courtesy serving all people regardless of their gender, color or creed. The tales of the express made the company famous. In 1905, Nevada National Bank merged with Wells Fargo in California forming the national bank of Wells Fargo Nevada which later combined with the Union Trust Company forming Wells Fargo Bank. In 1960, a merger occurred between the company and the American Trust Company creating the Wells Fargo Bank American Trust Company.The bank owned numerous branches in the US ad was considered among the largest banks in the country. Its services included mortgages, financial management, insurance, and banking. In offering the services, the company uses innovative solutions in offering convenient banking for consumers (Wells Fargo, 2018). Through affiliates, retail branches and subsidiaries, the company has been able to penetrate the global market.
Financial reporting practices and performance of Wells Fargo and competitors
The global economic crisis in 2007 affected most businesses in the US and across the world. Major Banks in the US were faced with the financial crisis and had to adopt new strategies for financial stability. One of the strategies was acquisition where J.P. Morgan acquired Washington Mutual, Bank of America acquired Countrywide and Merrill Lynch, and Wells Fargo acquired Wachovia. The banks used acquisition as a means to shore up deposits and prevent system collapse. The strategy was effective as these banks managed to remain competitive even with the recession (MX Technologies Inc., 2018). In this section, financial statistics and basic strategies of generating revenues and income are compared.
In 2016, Wells Fargo revenues were $88.2 billion compared to $95.6 billion of JP Morgan Chase, and $83.7 billion of the Bank of America. In 2014 and 2015 Wells Fargo’s revenues were $84.3 billion and $86.1 billion consecutively compared to $95.1 billion and $93.5 billion of JP Morgan Chase and $85.1 billion and $83.4 billion of the Bank of America. In 2016, JP Morgan Chase had a higher net income of $24.7 billion, followed by Wells Fargo with $21.9 billion, and Bank of America had $17.9 billion (MX Technologies Inc., 2018). Looking at these statistics, Wells Fargo performs better than the Bank of America but JP Morgan Chase out performs it.
The revenues of Wells Fargo in 2016 stood at $88.2 billion. In this year, the total loans finished at $949 billion an of 7% increase from 2015. This made the loan portfolio of the bank to be the largest compared to other banks in the US. The investment securities went up by 17% in 2016. JP Morgan Chase, recorded highest net income in the US. The investment portion of Chase continued thriving (MX Technologies Inc., 2018). However, on tangible equity, Wells Fargo performed better than Chase with 14% and 13%.
Wells Fargo over years has been known for growing faster compared to the largest rivals. Between 2013 and 2016, the bank maintained the lead on growth over its competitors as seen in the figure below.
Source: MX Technologies Inc. (2018). How the Four Biggest US Banks Generate Income and Revenue. Retrieved on 7 May 2018 from https://www.mx.com/moneysummit/top-us-retail-banks…
Wells Fargo has over years maintained its position as one of the largest banks in the US. Firs, the $255 billion market capitalization makes it the third largest bank in the US. Second, it has branches in all states apart from just 11 states (Wells Fargo, 2018). This makes it one of the few banks in America that are truly national banking chains.
While banks such as JP Morgan Chase and the Bank of America focus on appropriate reporting of the financial status, Wells Fargo at one point adopted a different strategy in financial reporting. The U.S. Securities and Exchange Commission operates on corporate disclosure rules whose purpose is to warn investors of major issues that could affect a company’s performance (Wells Fargo, 2018). However, the commission failed to step in earlier. For instance, in 2014, Wells Fargo excluded the shareholder proposals from the comptroller of New York. This kind of financial reporting is contrary to rules on financial reporting for banks. The excluded information would have enabled investors to identify workers that would expose them to major losses looking at their bonus incentives. The investors were denied a chance to save their investments from collapsing. The elimination of essential compensation information for executives from the voting materials of the investors prevented the world to identify red flags about Wells Fargo financial crisis (MX Technologies Inc., 2018). While competitors follow the disclosure rules laid in the US market, Wells Fargo financial reporting was flawed.
Wells Fargo questionable business practices
Wells Fargo has adopted various questionable business practices with a purpose of boosting the bank’s performance from the point of view of the naïve stakeholders and investors. According to Gujarathi and Barua (2017) the pay for performance system is risky for businesses and can even lead to business collapse. Unethical behaviour in a business is also associated with negative impacts. Ever since Wells Fargo was established it managed to maintain a good reputation in terms of principled performance and integrity. The bank used a cross-sell strategy in expanding its performance as well as stock. To implement the strategy, an incentive system was established here employees were awarded bonuses for opening accounts for customers. The employees who failed to meet the quotas were reproved (Heskett, 2017). The management of the bank was so obsessed with the cross-sell strategy that it masked the vision of giving priority in serving the interests of customers.
Opening of fake accounts
In 2013, LA Times revealed that some employees in Wells Fargo had opened fake credit cards and accounts to ensure that they meet the set quotas to benefits from incentives and avoid being reprimanded.The bank denied the claims. In 2016, the companied admitted that over3.5 million fake accounts had been opened. To get bonuses the workers had to hit a huge target in sales. Majority of the employees felt that the targets were unrealistic. Therefore, instead of looking for real customers, the workers opted to open accounts by using the names of the existing customers, using fake emails, and fake pin numbers to sign the accounts in. To make the accounts real, money transferred would be conducted between the accounts. More than 5,000 workers created millions of fake accounts. The accounts racked up over $2.5 million in fees (Egan, 2017). The fees were paid by consumers who learnt that they had credit cards that they had not applied for accompanied by various penalties and insufficient funds. The fake accounts enabled the back to earn unwarranted fees. The employees were also able to increase the sales figure which translated into making more money.
According to CNN Money, more than 5,300 workers were fired for the shady conduct. Customers were unknowingly enrolled in online banking services through fake emails and PIN numbers (Egan, 2017). According to a consulting firm hired by Wells Fargo, over 1.5 million deposit accounts were opened by the employees. According to the analysis, employees moved funds from existing accounts of their customers to new accounts that they had created without the consent or knowledge of the customers (Gujarathi & Barua, 2017). This made customers to be charged for overdraft and insufficient funds in their original account. This way the bank was able to earn more. Over 565,443 credit card accounts were submitted without the consent or knowledge of the customers. Out of these accounts, 14,000 gained more than $400,000 in fees drawn from overdraft protection fees, annual interests, and interest charges.
Modification of mortgages
Wells Fargo has been accused of making unauthorized changes to mortgages. For some clients, the mortgages have been extended by decades. Some borrowers have accused the bank of sending them into bankruptcy with the malpractice. The bank faced a 26 lawsuit through a class-action status claiming that it manipulated the overdraft fee system to strengthen the revenues. According to the lawsuits, the unauthorized changes were being made even during the fake account scandal. While short-term borrowers would benefit from the changes with lowered monthly payments, the terms of the loan were extended for many years. Banks can make changes to a payment plan for people in bankruptcy. However, the changes are subject to approval by parties involved and the bank (Morgenson, 2017). Wells Fargo went ahead to make such changes without the approval.
One of the complaints had 16 years to complete their mortgage. The medical expenses led them to bankruptcy in 2014. However, the bank went ahead to modify the mortgage of the customer regularly without the consent. According to the lawsuit, the bank extended the mortgage term by over 26 years.According to the lawsuit documents, the bank sneaks to modifying mortgages on naïve homeowners. The bank has been accused of using customer documents to modify the mortgage structure without customer authorization. While it is unclear of how widespread the issue was, the company admitted to over 100 times that it engaged in such practices in Charlotte based on the lawsuit (Morgenson, 2017). The lawyers also acknowledged such cases in New Jersey, Texas, Louisiana, and Pennsylvania. The purpose of such practices is making extra interest from longer home loans. While the modifications are established to help customers who are struggling financially, the bank has been accused of misusing the function to extort more profits from innocent customers (Morgenson, 2017).
Overcharging missed mortgage deadlines
Wells Fargo was accused of charging missed deadline even when delays were caused by the bank. According to the bank, 110,000 holders of mortgages were fined for missed deadline even when the delays were its own fault. The company pledges to compensate the customers. What happened is that normally, the company’s mortgages interest rates have an expiration date (Egan, 2017). Sometimes, the interest rates expire before loan closure. The bank or the customer can be at fault. When it’s the fault of the borrower, they pay to prolong the rate. However, for the case of Wells Fargo, the company put blame on borrowers for delay even when it was its specific fault. A claim that the bank admitted and promised to reach the victims for refunds. The bank said that after a review, it was determined that the lock policy of mortgage policy as sometimes inconsistent. The reviews showed that some mortgagors were charged even when the bank was mainly accountable for the interruptions. While some of the charges were appropriate, the majority were inappropriate. The bank engaged in the questionable practices for the sake of boosting revenue at the expense of naïve investors (Egan, 2017). The bank promised to solve the mortgage mess as part of the process to rebuild trust with the customers.
Auto insurance scandal
Wells Fargo was involved in auto insurance scandal. The bank was accused of being deceitful to the congress concerning a developing scandal in the business of auto insurance. The bank admitted to forcing auto insurance on over 570,000 mortgagors who didn’t require it. Approximately 20,000 of these clients had their cars reclaimed partly wrongfully because of the unwanted insurance charges (Egan, 2017). Even though the company identified the problem earlier, they failed to report the matter. According to the bank, it became aware of the auto insurance disaster in July 2016 after receiving complaints from customers. However, during the hearings of the fake account scandal in September, the information was not disclosed. The bank started issuance of refunds to the victims and targeted on reimburse all the affected customers by the mid of 2018. While the fake accounts scandal was fuelled by sales goals, the bank claimed that the auto-loan scandal was different. Instead, the bank put blame on the unwanted auto insurance on bank system errors (Egan, 2017). The auto loan contracts enabled the bank to place customers in auto insurance upon the lapse of their own policies. This is a rare policy in big banks.
Ripping of small businesses
Wells Fargo has been blamed of ripping off small companies. The bank was accused of overcharging small businesses involved in credit card transactions. According to the lawsuit, business owners who attempted to withdraw from the bank were massively charged for the early termination. The sophisticated businesses were the target of the overbilling scheme (Egan, 2017). A deceptive language was designed to confuse the business owners in a 63 page contract according to the lawsuit filed in August. One of the employees at the bank, told CNN Money that the employees were given instruction to target the small businesses that lacked legal support. According to the former employee, the contract was so vague for any business owner to leave. Queen City Tours, one of the plaintiffs claimed that it was required $500 as the fee for early termination after making an attempt to leave the bank. Another plaintiff, Patti’s Pitas, the Pennsylvania restaurant claimed that it was broken up by the excessive fees even after collapsing in May 2017 (Egan, 2017). When the owner attempted to leave the contract, the bank denied it due to a three year term unknown to the owner. The bank later closed the account since it was under heavy legal scrutiny. The bank however, denied the claims and planned to defend against it.
Selling of dangerous investments
Wells Fargo engaged in the selling of dangerous investments to customers. According to regulators, Wells Fargo sold investments to costumers that it was almost a guarantee that they would lose the money. The regulators accused the company of advising customers to but unsuitable investments. The investments are known as products that are linked to volatility which are extremely possible to drop in value with time. The company pressed the customers to buy the investment to protect itself against market downturn (Egan, 2017). The investments degrade significantly with time and are only meant for short-term as opposed to long-term investment strategies. According to FINRA, a self-regulatory body of Wall Street accused the company of recommending the volatility-linked products without understanding the risks involved with the investments. For instance, one of the products iPath S&P 500 VIX Short-Term Futures ETN (VXX) has lost 99.97% of the value since its launch in 2009. This proves that Wells Fargo sold the investment with insufficient understanding. While the bank didn’t deny or admit to the charges, it admitted to ending the investments sales and making changes in policies and supervision. The company said that it is committed to offering advice on investment that is reviewed regularly and in alignment with the risks and objectives tolerance (Egan, 2017).
Wells Fargo was accused of employee retaliation after whistleblowing. The company admitted to receiving claims of alleged retaliation for whistleblowing on automobile lending practices. According to a report by Wells Fargo, several other former employees claimed on being terminated for raising concerns about the bank’s operations. Although the company didn’t indicate the number of claims, it admitted to at least one lawsuit concerning the issue. The Labor Department said that it does not deny or acknowledge the complaint existence (Wattles et al., 2017). Some of the former employees claim that they were fired after hinting at the wrongdoing in the bank to the ethics hotline. In the filing the company admitted to facing various employment litigation comprising a class action lawsuit filed by former workers who claim that they were punished for protesting sales practice questionable behaviour. Additionally, the back said that it faces many complaints including state law whistle-blower actions alleging retaliation filed with the department of labor. In 2017 the company was ordered to make payments of $5.4 million to re-employ a whistle-blower who was dismissed for contacting ethics hotline due fraud suspicion. The CEO insisted that the workers would not face retaliation for flagging unethical behaviour in the company (Wattles et al., 2017).
Wells Fargo is amongst the largest Banks in the US. Before the emergence of the scandals, the bank maintained its position as one of the three leading banks in the US. However, the faster growth trend was challenged by various scandals that emerged in 2016 which made regulators to fine the company $185 million. Fed also said that the bank will not be allowed to expand its business until its convinced that the bank has cleaned up its mess. Between 2016 and 2017, the company has been accused of various fraud actions and to a great extent admitted to the scandals. The scandals include the opening of fake accounts in response to target sales pressure, repossessing customers’ cars without a court order, employee retaliation, modification of mortgages without customer consent or authorization, inappropriate auto insurance charges, ripping off naïve business owners, wrongly fined mortgages, and giving wrong advice to customers on dangerous investments. In financial reporting, Wells Fargo engages in withdrawing necessary information that can help customers and investors to see red flags on potential scandals. Business engages in frauds to boost their revenues at the expense of naïve investors. It is thus important for governments to conduct regular audits in public companies to protect the public from such fraudulent activities.
Egan, M. (2017). Wells Fargo accused of ripping off mom-and-pop shops. CNN Money. Retrieved on 7 May 2018 from http://money.cnn.com/2017/08/11/investing/wells-fargo-small-business-credit-card-fees/index.html
Egan, M. (October 3, 2017). Wells Fargo accused of lying to Congress about auto insurance scandal. CNN Money. Retrieved on 7 May 2018 from http://money.cnn.com/2017/10/03/investing/wells-fargo-lie-congress-hearing-auto-insurance/index.html
Egan, M. (October 4, 2017). Wells Fargo wrongly hit homebuyers with fees to lock in mortgage rates. CNN Money. Retrieved on 7 May 2018 from http://money.cnn.com/2017/10/04/investing/wells-fargo-mortgage-rate-lock-fees/index.html
Gujarathi, M. & Barua, S. (2017).Wells Fargo: Setting the Stagecoach Thundering Again. Harvard Business Review.
Heskett, J. (2017).What Are the Real Lessons of the Wells Fargo Case? Harvard Business School. Retrieved on 7 May 2018 from https://hbswk.hbs.edu/item/what-are-the-real-lessons-of-the-wells-fargo-case
Morgenson, G. (June 14, 2017). Wells Fargo Is Accused of Making Improper Changes to Mortgages. The New York Times.Retrieved on 7 May 2018 from Wells Fargo Is Accused of Making Improper Changes to Mortgages
MX Technologies Inc. (2018). How the Four Biggest US Banks Generate Income and Revenue. Retrieved on 7 May 2018 from https://www.mx.com/moneysummit/top-us-retail-banks-income-revenue
Wattles, J., Geier, B. & Egan, M. (2017). Wells Fargo’s 17-month nightmare. CNN Money. Retrieved on 7 May 2018 from http://money.cnn.com/2018/02/05/news/companies/wel…
Wells Fargo (2018). Exhibit 13, pp. 38- 278.
Wells Fargo (2018). SEC and Other Regulatory Filings. Retrieved on 7 May 2018 from https://www.wellsfargo.com/about/investor-relations/filings/