Foreign what's up guys and welcome back to Wall Street Millennial On this channel and podcast, we cover everything related to socks and investing. The Wall Street Mega Banks including Goldman Sachs Morgan Stanley Bank of America and others run the financial world and make billions in the process. But even within their exclusive Circle there is a clear hierarchy. JP Morgan is the largest bank by assets, while Morgan Stanley and Goldman Sachs routinely dominate the investment banking and trading.

Industries Wells Fargo Once one of the most admired American banks used to command respect amongst his Commercial Banking peers, it had a rock-solid reputation for taking few risks and thus being incredibly safe and stable for customers and depositors. But since the financial crisis, the company's fortunes have taken a sharp turn for the worse. The company's net income and return on Equity peaked in 2013. Since then, revenue and profits have tanked on the back of an unprecedented vet imposed asset cap and inability to attract new customers.

In 2018, then C CEO Tim Sloan announced the company would be firing tens of thousands of employees to try to get its costs under control. This came at a time when all the other Wall Street Mega Banks were posting record profits in early 2019. After just three years in the role, Sloan was forced out as CEO due to his inability to manage the company's poor financials and mounting scandals. In fact, company scandals and their consequences have been one of the biggest factors keeping the company a deep Value stock.

In 2018, the Federal Reserve imposed an unprecedented asset cap on the bank until it quote improves governance and controls unquote. a punishment that remains in place to this day. The asset cap has stunted the company's performance ever since then. In this video, we're going to go over the shockingly incompetent managerial choices that have spelled the downfall of Wells Fargo.

Also remember that you can always catch us an audio format on the Wall Street Millennial Podcast Just Search for Wall Street Millennial on Spotify or Apple Podcasts Of the Wall Street Mega Banks Wells Fargo is one of the oldest, second only to City. It is formed in 1852 in California to service the booming California Gold Rush With people suddenly making millions of dollars in the region in the accompanying Mass migration to California, people needed both a reliable bank to deposit their Newfound fortunes and a fast delivery system to send Goods back to the east coast. Wells Fargo served both of these needs through its banking services as well as its Pony Express mail business. The iconic Wells Fargo Stagecoach continues to be an iconic part of the company's logo.

The company continued to grow both through acquisition and organically, and in 1998 it merged with Norwest Corporation to form The Banking Behemoth It is today, but even the most successful organizations aren't perfect. Any large money-making Corporation is vulnerable to the phenomenon of the perverse incentive. People within the organization are usually compensated by a combination of salary and bonus, with the bonus portion being dependent on some measure of performance. This performance-based incentive can drive employees to do Shady or illegal things on behalf of the company.

For example, back in 2008, an employee at the French Banking Giant Society Generality named Jerome Curviel made extremely risky trades on behalf of the firm. These trades eventually incurred over five billion dollars of losses for the bank. For curviel, had those trades worked out, he would have been liable to receive hundreds of thousands of dollars in bonuses. He knew that he was literally playing with the bank's money.

So even though the trades were sub-optimal for the company, the bank incentivized him to take on that risk. Wells Fargo had a somewhat similar situation, but on an even bigger scale. In 2016, it was revealed that Wells Fargo had agreed to pay billions to settle a long-running scandal where their sales representatives created fake accounts in the names of their customers without their permission and in many cases without their knowledge. According to the Department of Justice and SEC, the company's remarkable fraudulent conduct caused unexpected and unlawful fees being charged to Consumers for bank accounts that were opened without their consent.

There were even reports of the bank charging fees to homeless people for accounts that they opened up without their knowledge. The fake account Scandal absolutely obliterated Wells Fargo's previous Rock Solid reputation for risk management and being run conservatively. After the Scandal was exposed, customers started fleeing the company like rats off a sinking ship. Understandably, no one wanted to bank with a company that would defraud its own customers.

The fake account Scandal had several negative impacts on Wells Fargo's business. First, there is the immediate impact of fines and settlements from the various regulatory authorities. Together with the Department of Justice, the SEC forced the bank into a three billion settlement. This is in addition to 200 million dollars in fines and restitution brought by the Consumer Financial Protection Bureau and continuing settlements and penalties that they are paying to this day.

But perhaps even more impactful than the fines was the harm to the company's reputation. Following the investigations, Wells Fargo lost a number of Big Time public clients California suspended its business relationship with the bank for a year and ended an agreement whereby Wells Fargo would underwrite their Municipal Bond offerings. California State treasurer John Chang announced publicly that the bank had been disturbingly opaque in the way it did business and that continuing Revelations of the bank's greed and lack of institutional control were the reasons why California would extend its sanctions against the bank for an additional year. Other clients, including the cities of Chicago Philadelphia and Seattle title, as well as the state of Illinois all ended their relationships with Wells Fargo.

The fake account Scandal is a topic worth an entire video for itself, but as it turns out, it's only one of several examples of the company's unethical business practices and the pattern of abuses caused. one of the most Draconian penalties ever levied on a bank. The 2018 Federal Reserve imposed asset cap. In 2018.

Following a series of further scandals at Wells Fargo, the Federal Reserve imposed an official asset cap on the bank. This meant that Wells Fargo was restricted by the amount of assets that it could hold and was required to reduce its total assets by approximately 300 billion dollars. The asset cap was imposed as a result of mounting concerns about Wells Fargo's risk management practices and corporate governance. These scandals had led to significant regulatory fines and penalties, But due to their ineffectiveness, the Federal Reserve determined that the assay Gap was necessary in order to protect the bank's own customers and the overall Financial system by not allowing the bank to grow its asset base and in fact forcing it to shrink.

It aimed to reduce the chance that it would pursue growth by shady means. Under the asset cat, Wells Fargo was required to develop a plan for reducing its asset size and improving its risk management and corporate governance practices. It was also required to submit regular reports to the Federal Reserve outlining its progress in meeting these requirements and replaced several board members. The the asset cap had a crippling effect on the bank's business.

It severely limited the bank's ability to generate Revenue The asset cap restricted the amount of assets that Wells Fargo could hold. It thereby restricted the Bank's ability to generate income by lending out those assets. This reduction in income had a very noticeable effect on the bank's overall financial performance. In addition to reducing income, the asset cap also had a number of other consequences for Wells Fargo's financial performance.

For example, the bank was required to divest hundreds of billions of dollars worth of assets in order to comply with the asset cap. The asset cap also put pressure on Wells Fargo to reduce its expenses in order to maintain profitability, which inevitably led to sub-optimal cost cutting measures and restructuring. You can see these effects clearly in the numbers. Starting in 2016, the company's total assets flatlined, but due to the company's poor efficiency, its shareholders Equity has decreased substantially.

Shareholders Equity is essentially what's left after subtracting total liabilities from assets. Wells Fargo's return on equity which you can think of as how well a company is able to generate profits from its Equity has been on the decline since 24 14 and since its assets are capped, its liabilities have only been increasing. That could only cause the bank's net income to Fall Like A Rock So what exactly has caused Wells Fargo's deteriorating? Financial Efficiency and profits. The biggest reason is obviously the asset cap.

If you can't grow your deposits, you can't increase the amount of capital that you lend out. But even if there were no asset cap, there's a chance that Wells would be in the same position anyway. According to the company's investor relations, the companies saw a stunning 20 to 25 reduction in new business following the fake account scandal. Even worse, existing customers were also leaving the company at an accelerated rate even if the asset cap were lifted.

It would do no good if they can't attract mortgage borrowers because of the fear of getting scammed by the bank. And on top of all that, there's still the impact of all the fines and penalties that have been piling up. As recently as December Of 2022, the Consumer Financial production Bureau announced a new massive fine of 1.7 billion dollars in addition to another two billion dollars in Damages to Consumers. The reasons were wide ranging from inappropriately repossessing homes and cars to improperly imposing surprise fees and interest charges to customers.

The Cfpb called the bank a repeat offender that uses a quo rinse and repeat cycle of violating the law unquote to defraud. Americans Wells Fargo has now paid billions of dollars in fines due to its various scandals over the past decade. Usually these kinds of fines don't amount to much for a Wall Street Mega bang, but because they just keep piling up for Wells Fargo and because their earning power is already shrinking, they're starting to have a real impact on the bank's profits. Last quarter, the company made about 15 billion dollars in net profit.

The most recent 3.7 billion dollar fine would account for about a quarter, of that, and there's no end in sight for these penalties. The Cftc and other Regulators have said further fines may be coming and the FED has kept the asset cap on. Besides the fake account Scandal, there have been numerous other scandals that make it difficult for Wells Fargo to regain the trust of the public and The Regulators one example goes all the way back to 2004. as a Commercial Bank, the backbone of its business is lending out its deposits to individuals and businesses, including mortgages for home buyers.

When a home buyer buys a house, usually they'll only actually pay about 20 percent of the purchase price in upfront cash. The remaining 80 is borrowed from a bank a loan which comes with an interest rate. The interest rate is calculated on an individual basis by the bank's agents based on the risk profile of the borrower. If the borrower has a high personal income, a good credit history of making their loan payments in the past, and is buying a solid asset, they'll be considered less risky by the bank and usually offered a lower interest rate.

On the flip side, a mortgage application with poor credit or from someone who has a low income may be determined to be at high risk of not being able to repay the loan, principal or interest. In this case, the bank will demand a higher interest rate to compensate them themselves for the risk or reject the application. Altogether, the FICO score is a dominant credit rating assigned to just about everyone these days. A typical FICO score is about 700, with a Max of about 850 and minimum of 300..

any score over 700 is considered pretty good, and above 800 is extremely good For almost all lenders, it's the single most important factor in determining what interest rate is offered to mortgage borrowers, but apparently that wasn't exactly the case for Wells Fargo In 2009, they were investigated for discrimination. when processing loan applications. tens of thousands of customers were unfairly given higher interest rates compared to other customers of similar credit worthiness. In particular, thousands of customers were given subprime mortgages rather than Prime mortgages, not on the basis of their credit, but on their raise.

On average, these borrowers were charged tens of thousands of dollars more per loan than their non-minority counterparts. These unfair loan terms cost these borrowers close to 200 million dollars in extra interest, expenses, and fees. Wells Fargo Eventually settled with a Doj for 200 million dollars. In an article from 2009, the New York Times described speaking to a loan officer at Wells Fargo.

She said that for over a decade Wells Fargo would Target black neighborhoods in Baltimore She described loan officers like herself writing quote the Stagecoach from Hell Unquote, referring to them steering black borrowers into higher interest rate subprime mortgages. Wells Fargo is now the smallest of the so-called Big Four banks in terms of market share according to Statista. Since the fake account, Scandal people are understandably hesitant to bank with them when there are so many other reputable Banks you could choose, especially when the bank seems to be doing everything it can to push away potential customers. According to Bloomberg Wells Fargo had one of the largest gaps in average mortgage approval rates between white and black applicants among the major mortgage writers.

They also had some of the lowest overall mortgage approval rates. They approved less than 50 percent of applications from black applicants. In contrast, JP Morgan improved 81 percent in Rocket Mortgage, which is the largest mortgage loan provider in the country approved 79. We're not saying that Wells Fargo is an inherently discriminatory institution, but given their history and Current financial position, they can't afford not to take a hard look at what they can improve as a result of the asset cap and other operational challenges.

at Wells The company's stock has severely underperformed its peers. Over the past five years, it has lost almost a hundred billion dollars of market cap, while at the same time other Mega banks have flourished with almost no growth and declining profitability. It has become one of the low quality banks that has given low stock price multiples by the market. But that begs the question.

Has the price dropped so much as to make it a legitimate value play? One of the biggest bull Theses for investors is the hope that the FED is close to lifting the asset. Gap Once it does, the bank will be allowed to grow again, lifting its earnings and theoretically its stock price. But these hopes have existed for years The unprecedented asset cap was imposed by Janet Yellen's Fed and maintained under Jerome Powell It has now been five years and as of the recording of this video, there is no indication that the FED plans to lift it. In fact, various Regulators have said the bank is reforming too slowly and new scandals and fines have continued to.

Bubble Up for the bank. this video is not Financial advice, but I personally would not touch Wells Fargo stock as it is now with a 10-foot pole. There are just too many Alternatives that offer Great Value but without all the baggage. All right guys that wraps it up for this video.

What do you think about Wells Fargo's various scandals? Do you think there is anything systemically wrong at the company? Let us know in the comments section. Below In the meantime, thank you so much for watching and we'll see you in the next video. Wall Street Millennial Signing out.