Three questions after Wells Fargo CEO's abrupt exit

Wells Fargo's fake-accounts scandal broke in September 2016, and the company insisted that an insider, Tim Sloan — who had come up primarily through commercial banking, not the tainted consumer banking operation — could fix the broken coporate culture that had existed under his successor, John Stumpf.

That argument was proved wrong Thursday after a lengthy period of employee firings, management purges, new discoveries of misdeeds, bad headlines and regulatory crackdowns.

Sloan, 58, announced his retirement late in the afternoon, a move that he said would benefit the company as it attempts to rebuild its reputation. He officially retires June 30 but is stepping down as CEO immediately, leaving Wells’ general counsel, C. Allen Parker, as interim CEO until the firm decides on a permanent replacement.

Here are answers to three key questions about why Sloan left now, what role policymakers had in the decision and will continue to have in the company's future, and who in the world would want to be CEO of Wells Fargo.

Tim Sloan, president and chief executive of Wells Fargo, waits for the start of a House Financial Services Committee hearing in Washington on March 12, 2019.
Was Sloan pushed out, and by whom?
It’s no surprise that Tim Sloan was forced out as the head of Wells Fargo, which after two and a half years could not put its bogus-accounts fiasco and other scandals behind it. But one of the bigger questions is why it finally happened now.

The board had seemed patient with Sloan, but rumors would surface now and again that other candidates were being considered. Still, given tough moves by regulators — the $1.95 trillion asset cap imposed by the Fed last year, and the Office of the Comptroller of the Currency's recent (and rare) public rebuke of the company — the natural inclination was to see this as a move to please regulators as well as politicians who have been hammering the company for failing to clean up its act and possibly being too big to manage.

Sloan spoke at an industry conference in San Francisco less than 24 hours before his resignation was announced Thursday. He was introduced by Greg Baer, the CEO of the Bank Policy Institute, a trade group for big banks, who commented that Sloan held the most difficult job in America.

Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, said that the Wells board of directors had just recently closed ranks around Sloan.

“The board had already reinforced support for him recently and [he had] given his comments in front of Congress. It seemed like he was sticking around for the long term,” Kleinhanzl said.

In an investor call following the announcement, Sloan and General Counsel C. Allen Parker — who has been named interim CEO — said that the decision was not tied to any issues with the pending regulatory orders. But there was no getting around that Sloan himself had become a lightning rod.

“This was my decision based on what I thought and believe is the best for Wells Fargo, because there has just been too much focus on me,” Sloan said. “And it’s impacting our ability to move forward. I just care so much about this company and so much about our team that I could not keep myself in a position where I was becoming a distraction.”

Still, Kleinhanzl said, regulators’ recent comments about Wells — including OCC officials’ comments that “we continue to be disappointed with Wells Fargo Bank N.A.’s performance under our consent orders and its inability to execute effective corporate governance and a successful risk-management program” — could suggest that there may be some new, unwelcome news coming from regulators that Wells’ board of directors wanted to preempt with Sloan’s departure.

“Given the comments from the regulators — that was highly unusual — it shows how fractured that relationship had become and it makes us concerned that there could be new information coming out from regulators, whether it be potential actions or an extension of the asset cap,” Kleinhanzl said.

Sloan “was meant to be a breath of fresh air, but clearly time showed that bad practices continued during his tenure,” said Arjan Schütte, founder and managing partner of Core Innovation Capital, a venture capital firm that specializes in financial services. “I think his job was to be a nontoxic steward for a good asset, and I don’t think he was able to transform their culture enough.”
Sen. Elizabeth Warren, D-Mass.
Senator Elizabeth Warren, a Democrat from Massachusetts, speaks during a Bloomberg Television interview in New York, U.S., on Wednesday, Jan. 30, 2019. Warren commented on her proposed wealth tax plan. Photographer: Christopher Goodney/Bloomberg
What will regulators and lawmakers do now?
Federal regulators and members of Congress likely will continue pressing Wells Fargo to adopt changes to the bank’s culture and risk management processes, but a commitment by the bank to hire externally to succeed Sloan addresses some of the criticism from policymakers.

Lawmakers’ calls grew for Sloan’s firing in March when, just after he testified before the House Financial Services Committee, Wells announced the bank had awarded Sloan a $2 million bonus for 2018, bringing his total compensation package up to $18.4 million for the year.

“Mr. Sloan presided over scandal after scandal at Wells Fargo, tried to minimize the wrongdoing in his testimony to Congress, and then failed to give customers the relief he promised,” Rep. Katie Porter, a California Democrat and committee member, said Thursday. “It was time for him to go — without a golden parachute.”

Both House Financial Services Chairwoman Maxine Waters, D-Calif., and Sen. Sherrod Brown of Ohio, the ranking Democrat on the Senate Banking Committee, said Sloan should be shown the door, after the bonus was announced. Sen. Elizabeth Warren, D-Mass., has for months called on regulators to remove Sloan as CEO before the bank’s growth cap is removed.

Now that Sloan is leaving, lawmakers from both parties said they will be watching closely to ensure that the bank’s new leadership implement changes to its management and culture.

“The mismanagement at Wells Fargo runs deeper than Mr. Sloan,” Porter said. “The bank has a lot of work to do to fix its problems, and Congress and our bank watchdogs need to continue pressing for change.”

Rep. Patrick McHenry of North Carolina, the top Republican on House Financial Services, echoed those sentiments.

“The bottom line is that we’ve not seen the type of cultural or institutional change so desperately needed at Wells Fargo,” McHenry said. “The bank needs a change agent. I will be watching closely to ensure the next leader of this organization shows commitment to rebuilding trust.”
Elizabeth Duke, former governor of the Federal Reserve and current member of Wells Fargo’s board.
Elizabeth Duke, governor of the U.S. Federal Reserve, testifies to the Housing and Community Opportunity Subcommittee about mortgage and foreclosure servicing in Washington, D.C., U.S., Thursday, Nov. 18, 2010. U.S. House lawmakers criticized the Obama administration's program to prevent foreclosures as a Treasury Department official testified that the initiative has reduced monthly mortgage payments for almost 520,000 homeowners. Photographer: Joshua Roberts/Bloomberg *** Local Caption *** Elizabeth Duke
What kind of person must Wells pick, and what will that person have to do?
Job one for Wells management and the permanent successor to Sloan will be getting out from under the asset cap.

Tim Sloan’s departure is “an opportunity for Wells Fargo to distance itself from its past business practices,” said Julie Solar, senior director at Fitch Ratings.

“His departure, in and of itself, is unlikely to impact ratings,” Solar said. “Our focus will be on who ultimately replaces Sloan and how they are able to move the company past its issues.”

Fitch has predicted that Wells will satisfy the Fed consent order and that it will be lifted by year-end.

“Failure to have the asset cap lifted by this time would likely be viewed negatively by Fitch,” Solar said.

Scott Siefers, an analyst at Sandler O'Neill, said the board’s decision to look outside the company for Sloan’s replacement was not really much of a decision at all. If the firm had elevated another of its own executives, the bank would have a hard time making a credible case that it had made a clean break from its pas malfeasance.

Ultimately the bank is unlikely to have a hard time finding a qualified candidate, Siefers said. Wells is one of the biggest banks in the industry and will be attractive to someone despite the immense pressure that will come with the job, he reasoned.

"I would suspect it'd be someone coming out of one of the largest banks or, even a large company that's a nonbank,” Siefers said. “On the one hand, my feeling over the past several months is that it's a tall order just to get somebody to take the job. By the same token, the reality is, even given all the congressional and regulatory pressure, anyone new who comes in is going to have a grace period, especially if it's from the outside.”

Kleinhanzl said the new CEO would have to come from a large bank, especially one with “that has good regulatory relationships.” For example, a JPMorgan has that kind of relationship and “a very deep bench” of executive talent to hire from.

“It's what they need at this point in time, especially when you are dealing with an institution that could break you up, as regulators can,” Kleinhanzl said. “They need to one, heal that relationship and two, start worrying about long-term prospects and growth of the company."

The board will have to move quickly. It claims it is starting the search from scratch. Chairman Elizabeth Duke said the company has not yet spoken with anyone outside of Wells Fargo as part of a search but that it decided it has no other choice but to look elsewhere.

“Although we have many talented executives within the company, the board has concluded that seeking someone from outside is the most effective way to complete the transformation at Wells Fargo,” said Duke, who is a former Fed governor.

There is one thing no one can dispute: Wells Fargo has now ousted two CEOs in less than three years and has little margin for error.

“It's a critical decision,” Siefers said. “The board can't misfire on this one."