Wells Fargo Chief Executive John Stumpf arguably faces the challenge of his career on Tuesday as he appears before the Senate Banking Committee to answer criticisms that he and other top bank executives should have detected and stopped millions of phony accounts from being opened.
The revelations of widespread fraud at Wells have already damaged the chances for Republican legislation aimed at reining in the Consumer Financial Protection Bureau and provided more ammunition for lawmakers that want to break up the big banks because they see them as too large to manage.
The hearing is shaping up to be a major test of Stumpf's leadership, and his performance may play a sizable role in how policymakers ultimately react. His biggest hurdle is likely to come when he faces questions from Sen. Elizabeth Warren, D-Mass., who has raised concerns in recent days with the bank's high-pressure sales culture, employee incentives, and the alleged corruption of large banks in general.
The hearing is also likely to touch on pushback from former employees, who argue that Wells managers pushed employees to vigorously cross-sell products or potentially be fired, creating an environment in which employees cut corners in order to try and keep their jobs.
Following are four key questions to look out for.
Will Stumpf continue to blame lower-level employees?
So far, Stumpf has maintained a defiant tone, blaming a nationwide pattern of illegal sales conduct on thousands of rogue employees. "If they're not going to do the thing that we ask them to do — put customers first, honor our vision and values — I don't want them here," he said last week in a Wall Street Journal interview last week.
But Stumpf's comments are being widely criticized, with some questioning how widespread misconduct by 5,300 employees who were later fired can go undetected for years without executives being aware and even possibly promoting it.
"His leadership and his legacy will depend upon knowing what information he had … and how he reacted to that information and set the tone from the top to ensure that behavior stopped," said Jennifer Taub, a professor at Vermont Law School and former associate general counsel at Fidelity Investments.
Blaming lower-level employees is standard procedure in securities fraud cases, lawyers said.
But lawmakers, particularly those who view Wells and other big banks as too big to manage, are likely to challenge Stumpf on this tactic. In many ways, Stumpf is trapped in a no-win scenario. If he continues to blame lower-level employees, he runs the risk that the bank will be seen as too big to manage. If he acknowledges senior executives made mistakes, it will fuel calls for his dismissal.
"Any attempt to lay blame on 'rogue employees' will likely backfire," said Ed Mills, an analyst at FBR.
Wells has hired outside counsel to conduct a full internal investigation to determine what happened, who knew about it and when. The Justice Department has also subpoenaed documents and will want any report generated by Wells' own investigation, including the names of those responsible.
"The breadth and longevity of the conduct is so great that it's hard to believe that someone at a senior level did not know about it early on," said Robert Giacalone, the Daniels Chair in Business Ethics at the University of Denver.
"The very number of people that had to be fired is an indication of the pervasiveness of the problem, and if it's that pervasive, why didn't they catch it?"
At the hearing, Stumpf is likely to announce that Wells will pay customers more money, this time for any damage to their credit scores as a result of the phony accounts. The company has so far paid $2.6 million of $5 million set aside for consumer restitution.
Is Wells' aggressive sales culture responsible?
Former employees are directly challenging Stumpf's assertions that they acted without the knowledge of top managers, arguing that they were pushed to meet sales goals no matter what.
"The level of dishonesty in the retail branch channel went all the way up, I can assure you," Robert Raymond, a former Wells Fargo adviser, said in an interview with American Banker. "This story has barely been told. What really tweaked me were the lives that were destroyed. They were pressured to play the game and change accounts."
Wells declined to comment for this article.
A lawsuit filed by nine former Wells employees in Los Angeles Superior Court in 2015 lists 20 different reports that were given to upper management of phony accounts being opened without customer approval. The former employees are seeking overtime wages for being forced to work during legal holidays, on weekends and after hours without compensation.
"Wells Fargo upper management relentlessly harassed and tormented each plaintiff on a daily basis being threatened, hounded, berated, demeaned, humiliated and reduced to tears during morning meetings if they did not meet the previous day's quotas, despite the fact that the quotas were not attainable," the lawsuit states.
Wells Fargo officials have repeatedly maintained that they stressed ethical behavior for all employees and those who were caught fudging numbers or opening accounts were quickly fired.
But Ruth Landaverde, a former Wells credit officer in Palmdale, who was not part of the lawsuit, said that the pressure to meet sales goals was ever present. She said the stress of the job caused her to have headaches and twitches in one eye.
"We were belittled unless we reached our sales goals," said Landaverde, who worked at Wells for a year and a half, ending in 2010.
She described how some employees would do very well and get paid bonuses or promoted, and then have other branches call to find out how they were able to outperform. Then there would be "waves of firings" in which managers went on a "witch hunt" to root out "some people who did unethical things," she claimed.
"The bank had so many workers get fired for sales goals because they weren't meeting them," she said. "Sometimes I would get reprimanded because I wasn't forcing [customers] to take the credit card or the loan, but people don't want to take a 21% rate on a credit card. There was no logic; all logic went out the window. It was you get to the number, you get to the number."
Will bonuses paid to Wells executives be clawed back?
The hearing could shed more light on whether Carrie Tolstedt, Wells' former head of community banking who announced her retirement in July at age 56, must pay back some of the millions she was paid in compensation.
Wells has denied that Tolstedt's retirement had anything to do with the enforcement action.
But Democrats are expected to grill Stumpf on how bonuses paid to Tolstedt were based on the bank's cross-selling ratios.
Tolstedt was so central to Wells' cross-selling culture that she is listed in regulatory filings, even though banks typically only list the compensation of their top five executives. Tolstedt was paid more than $15 million in 2015. She reportedly received a $125 million pay package as part of her departure.
Warren and other Democrats are already demanding that Stumpf tell them prior to the hearing whether Wells will take action to claw back incentive compensation paid to any senior executives.
Last week, Wells announced that it would eliminate sales goals for its employees starting on Jan. 1. But the bank is not eliminating incentive compensation entirely; it will continue to tie customer satisfaction and other factors to bonuses, a spokesman said. The changes to incentive compensation are still being worked out and have not been made public.
Then there are questions about how Wells recently changed its cross-sell ratio.
Analysts have long been concerned that Wells' cross-sell ratio had stalled, indicating a halt to its sales growth trajectory, said Marty Mosby, an analyst at Vining Sparks.
But in the second quarter, Wells stopped using four products — ATM cards, online banking, bill pay and direct deposit — to calculate its cross-sell ratio, according to a footnote in a July 15 press release. That resulted in a substantial increase to its cross-sell ratio, which rose to 6.27 in the second quarter from 6.09 in the first quarter (which was calculated under the previous metric).
The bank said in a footnote that it had dropped the four retail products from its cross-sell calculation because they did not meet its criteria for "revenue generation and long-term viability."
"The very products that inflated [Wells'] numbers were what the salesforce was using," Mosby said.
The products were among those that regulators identified as among the 1.5 million unauthorized bank accounts and 565,000 credit cards opened during a four-year period from 2011 to 2014.
Wells did not identify the business products that replaced the four retail products in its cross-sell ratio, but Mosby said they are small business loans, cash management services and business insurance products.
Will the hearing be another referendum on the CFPB?
Democrats and some media outlets have wasted no time arguing that the CFPB has emerged as the "hero" in investigating Wells, which may be overstating its role. Federal authorities appear to have learned about the phony accounts after it was publicly revealed in articles by the Los Angeles Times.
Still, Republicans have so far refrained from alleging that the CFPB was asleep at the switch.
It's also clear the CFPB played a big role in forcing Wells to acknowledge the problem. Without the CFPB, the civil lawsuit by the Los Angeles City Attorney Mike Feuer in 2015 might have been crushed by Wells, which fought back and initially tried to move the proceedings to federal court.
The CFPB was able to exert leverage by enforcing its authority to crack down on "unfair, deceptive and abuses act and practices," known as UDAAP. That power allowed the CFPB to fine Wells $100 million, the largest penalty it has ever assessed. The L.A. city attorney's office fined the bank $50 million and the Office of the Comptroller of the Currency got $35 million.
"It is quite clear that these are unfair and abusive practices under the law," Richard Cordray, the CFPB's director, said in announcing the settlement.
But there are open questions about whether the CFPB should have been even tougher. Each phony account opening is technically a fraud violation, and the agency has legal leeway to charge high penalties for each one.
The agency also did not name any higher-level executives in its Wells enforcement action, something it has done in actions against many nonbank firms. The Dodd-Frank Act requires the CFPB to make referrals to criminal authorities if wrongdoing is uncovered.
— Ian McKendry contributed to this article.