Wells Fargo & Co. earned $19.7 billion in 2024, “a year of significant progress,” its CEO proclaimed. Silicon Valley Bank failed nearly two years ago, stoking fears of a systemic financial crisis. Both institutions remain under the clouds of regulatory discipline.
On January 14, the Office of the Comptroller of the Currency (OCC) announced enforcement actions against three former Wells Fargo Bank executives stemming from “systemic and widespread sales practices misconduct” in and before 2016. Claudia Russ Anderson, chief risk officer of the community banking unit that was the fake-account-opening scandal’s epicenter, was assessed $10 million, chief auditor David Julian $7 million, and executive audit director Paul McLinko $1.5 million.
The three were included in a January 2020 notice of charges, but resolution was delayed as they went into administrative litigation. Eight others had settled with the OCC for $43.2 million in combined civil money penalties along with prohibition or cease-and-desist orders. Accounting for the bulk of that amount were ex-Wells Fargo chairman and CEO John Stumpf and community bank chief Carrie Tolstedt. Assessed one of the smaller sums, $1.25 million, was Michael Loughlin, a former Wells Fargo CRO.
Two days after the latest OCC announcement, the Federal Deposit Insurance Corp. filed a lawsuit in U.S. District Court for the Northern District of California against 17 officers and directors of Silicon Valley Bank, the biggest of three regional bank failures in March and May, 2023.
Among the former officials named in the FDIC’s civil complaint, potentially liable for billions of dollars of losses for alleged gross negligence and breaches of fiduciary duty, are chief executive officer Gregory Becker; chief financial officer Daniel Beck; Laura Izurieta, chief risk officer from 2016 to 2022; Roger Dunbar and Beverly Kay Matthews, chairs of the parent SVB Financial Group; and Mary Miller, a former T. Rowe Price fixed income division director and U.S. Treasury under secretary for domestic finance, who was a member of the SVBFG board risk committee.
According to the OCC’s and other legal allegations, Wells Fargo engaged in improper account-opening and cross-sales-inflating practices as early as 2002. The details came to light in 2016, leading to CEO Stumpf’s resignation that October, when he was succeeded by Timothy Sloan.
Thomas Curry, an appointee of President Barack Obama, was then head of the OCC, which is a bureau of the Treasury Department and the primary regulator of national banks. The investigations proceeded under Joseph Otting, who was Comptroller of the Currency during most of Donald Trump’s 2017-’21 administration.
In February 2018, near the end of her term as Federal Reserve Board chair, Janet Yellen announced a number of disciplinary steps, most notably a cap on Wells Fargo’s assets at their end-2017 level to ensure that the bank “will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”
Wells Fargo also reeled from a $3 billion Justice Department settlement in 2020 to resolve potential criminal and civil liability related to “pressuring employees to meet unrealistic sales goals that led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent.” The resolution included $500 million for the Securities and Exchange Commission to compensate investors misled by the banking company’s disclosures.
The growth restriction is still in place, but the $1.9 trillion-in-assets bank, No. 4 in the U.S., may be close to getting it lifted. The Fed is reportedly considering a third-party review that Wells submitted last September on its remediation efforts.
Charles W. Scharf
Presenting a stellar earnings report on January 15, Wells president and CEO Charles Scharf said, “We are seeing the benefits from investments we’re making to increase growth and improve how we serve our customers and communities. We maintained a strong balance sheet, we returned $25 billion of capital to shareholders, and we made significant progress on our risk and control work.”
Stressing that latter effort, Scharf noted the termination early last year of a 2016 OCC consent order regarding risk management and sales practices. This “was an important milestone and is a confirmation that we operate much differently today,” he said, adding that it was the sixth consent order terminated by regulators since he joined the bank in 2019. “Our operational risk and compliance infrastructure has greatly changed from when I arrived, and while we are not done, I'm confident that we will successfully complete the work required in our consent orders and embed an operational risk and compliance mindset into our culture.”
Wells Fargo agreed last September to an “action plan” addressing deficiencies identified by the OCC in financial-crimes risk management anti-money laundering controls – an enforcement priority further manifested in a December cease-and-desist order against Bank of America.
The decisions on Claudia Russ Anderson, David Julian and Paul McLinko were issued in the waning days of the Biden administration by Acting Comptroller of the Currency Michael Hsu. “These are the remaining outstanding enforcement actions among those that the OCC pursued against 11 individuals related to the bank’s systemic and widespread sales practices misconduct,” the agency said.
Hsu was appointed to his post in May 2021 by Treasury Secretary Janet Yellen. Although Hsu was a de facto peer of federal regulatory counterparts Martin Gruenberg, the FDIC chairman, and Federal Reserve Vice Chair for Supervision Michael Barr, President Joe Biden never had a permanent comptroller confirmed by the Senate. In 2021, Biden nominated Saule Omarova, a Cornell Law School professor who has since moved to the University of Pennsylvania Carey Law School. She withdrew before getting to a Senate vote, and Biden did not try again.
Hsu’s final Wells Fargo decisions followed, with some exceptions, recommendations from an administrative law judge in December 2022 after a 38-day hearing.
Michael J. Hsu
The Russ Anderson document runs 155 pages and says, in part, that from 2013 to 2016 she “failed to provide or provided false, incomplete, and/or misleading information to the OCC; failed to credibly challenge the bank’s incentive compensation program; failed to institute effective controls to manage the risks posed by SPM [sales practices misconduct]; and failed to escalate known or obvious risks related to SPM.” Those instances of misconduct each “constituted unsafe or unsound practices,” which in turn were deemed “reckless” under applicable law.
Russ Anderson’s civil money penalty was doubled from $5 million in the initial notice of charges. A portion of the order is devoted to justifying that change and refuting the former CRO’s arguments against it.
A separate, 102-page decision covers audit officials Julian and McLinko. Julian’s penalty climbed to $7 million from $2 million, McLinko’s to $1.5 million from $500,000.
Julian was found to have “failed to plan and manage audit activity that would detect and document SPM, failed to adequately escalate the SPM problem, and failed to incorporate risk events in incentive compensation recommendations.” McLinko “failed to plan and manage audit activity that would detect and document SPM, failed to adequately escalate the SPM problem, and failed to maintain independence from the Community Bank.”
McLinko was quick to protest, filing a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit on grounds including that “the rulings are arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law within the meaning of the Administrative Procedure Act.”
FDIC head Gruenberg, a Democrat who took heat from some Congress members for a misconduct scandal in the agency’s ranks and officially retired January 19, described the contours of the SVB lawsuit a month before it was filed.
The objective: “to hold these former officers and directors accountable for their breaches of duty in mismanaging the bank’s investment portfolios that exposed SVB to significant risks, caused SVB to incur billions of dollars in losses, and resulted in a loss to the Deposit Insurance Fund currently estimated at $23 billion.”
Martin J. Gruenberg
The now ex-chairman’s statement on December 17, when the FDIC board was considering taking the legal action, went over the oft-repeated sequence of events culminating in a depositor run and the closing of the $210 billion-in-assets SVB on March 10, 2023.
“In this matter, the former directors and officers mismanaged the bank’s held-to-maturity (HTM) securities portfolio by purchasing long-dated securities in a rising interest rate environment, breaching key internal risk metrics, and allowing an over-concentration of such assets, which far exceeded the holdings of its peer banks,” Gruenberg asserted. “This investment strategy exposed SVB to significant interest rate risk as the value of these securities declined sharply as interest rates increased.
“They also mismanaged the bank’s available-for-sale (AFS) securities portfolio by removing interest rate hedges in the AFS portfolio at a time of increasing interest rates. If this portfolio had continued to have been hedged properly, the bank would have been protected against losses from rising interest rates.
“Finally,” Gruenberg concluded, “SVB’s former directors and officers, who simultaneously served in equivalent positions for the holding company, SVBFG, permitted an imprudent payment of a bank-to-parent dividend from SVB to the holding company while the bank was experiencing financial distress . . . SVB suffered billions of dollars in losses for which the FDIC as receiver has both the authority and the responsibility to recover . . . It is vital that bank leadership be held accountable for their failures.”
Postmortem reports on SVB made note of its chief risk officer vacancy during 2022. Laura Izurieta’s lawyers maintain that charging her is “outrageous” because she stepped down as CRO in April 2022, 11 months before the bank was closed. “Their actions are reflective of outgoing FDIC leadership that is not interested in the truth,” said a statement reported by Reuters.
According to proxy filings, Izurieta in early 2022 entered into discussions about transitioning out as CRO. She remained in a consulting role until October 1, by which time a new CRO was not yet in place. The appointment of Kim Olson, most recently of Sumitomo Mitsui Banking Corp. and based at SVB’s New York office, was announced on January 4, 2023.
The FDIC did not name Olson as a defendant, apparently viewing Izurieta as accountable for calls made before SVB entered the danger zone.
Speaking at the Brookings Institution on January 14, Gruenberg looked back at financial crises he experienced in his Washington career and identified common threads:
“Interest rate and liquidity risk, reliance on uninsured deposits and wholesale funding, inadequate capital, leverage, rapid growth, poorly understood new financial products and companies, sheer size, inadequate risk management by the banks, and accommodating supervision and regulation have repeatedly forced the hand of the U.S. government to intervene and protect different types of creditors, and the firms themselves.”
He conceded that around 2018, “supervision should have been emphasized more, not less, especially due to SVB’s rapid growth and balance sheet concentrations.”