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Why Wells Fargo Might Not Survive Its Fake Accounts Scandal

August 31, 2017, 8:55 PM UTC

On Thursday, Wells Fargo announced that the scandal that has plagued it for nearly a year is ongoing: The bank discovered 1.4 million additional fraudulent accounts, bringing the total to 3.5 million.

This figure is staggering—both in the size of the wrongdoing of the bank’s employees and in that we’re still getting our heads around a scandal nearly a year after it blasted onto the front pages. It comes after the bank has admitted that it erroneously charged over 800,000 customers for car loan insurance that they no longer needed. And these incidents are only some of the thousand cuts that one of the most valuable brands in banking has endured.

These dark and accumulating clouds hanging over Wells Fargo lead us to ask the existential question: Can the bank survive? In the aftermath of the scandal, former CEO John Stumpf gave close to a textbook testimony on Capitol Hill—if the textbook needed an example of the worst possible way to handle a scandal in front of Congress. Stumpf hemmed and hawed, quarreling with members of Congress and giving misleading answers about the scope of this scandal. And it wasn’t just Stumpf: The bank’s entire public relations approach appeared to be to minimize the scandal and disclaim any problem at all.

In the most obviously misleading talking point, the bank kept insisting that the 5,300 fired employees represented something of a rounding error given that the bank employs almost 300,000 people. That would be a fair point—except that the real denominator we need is the number of employees engaged in cross-selling to Wells customers in the U.S.

Given the profound mishandling of the scandal at the top, it was natural for the board to prompt a change in leadership and pursue an internal investigation. But the new CEO is Tim Sloan, former president and chief operating officer who has worked at Wells since the late 1980s. That’s not exactly a fresh direction. Worse still is the board’s own exculpatory report, written by the law firm Shearman and Sterling. The report recites at length why the board did everything it could have done and congratulated it for the independent decision to fire Stumpf and another senior executive responsible for the mess.

The board members themselves, on the other hand, were by their lawyers’ “independent” account beyond reproach. As Harvard professor Howell Jackson put it, “If you have a taste for the genre” of self-serving, nominally independent but wholly insulated post-scandal law firm reports, “the Shearman & Sterling Report is nicely executed. But if you are trying to figure out whether the Wells Fargo directors should be elected to another term of service, the Report needs to be unpacked with a more careful eye.” It is no surprise, then, that the board faced significant shareholder backlash in the aftermath of both the scandal and the board’s response to it.

There is some light on the horizon. This month, Wells announced that former Federal Reserve Governor Elizabeth Duke will ascend to the board’s chair. Duke was a competent, well-regarded member of the Fed’s Board of Governors throughout the financial crisis, from 2008 to 2013. Although Wells faces a different kind of crisis altogether, Duke’s experience will be valuable and could prove decisive in guiding the bank out of the morass its former leaders have placed it in.

I will be teaching the Wells Fargo case to Wharton students this year. In the fall, it will be a case of how to mismanage a firm’s responsibilities to employees, customers, the government, and markets. In the spring, I have no idea what I will teach. It is up to Wells Fargo’s senior leadership to write the rest of that story.

If this week’s news means Duke and her new associates are finally giving the public the full disclosures, serious investigations, and meaningful accountability that this scandal has needed from the beginning, then the story might have a happy ending. If the week means we’re seeing more of the same—incremental disclosures with no serious attempt to excise this scandal at its source—we may well soon be talking about Wells Fargo the way we talk about Wachovia, Washington Mutual, or Lehman Brothers.

Peter Conti-Brown is an assistant professor at The Wharton School of the University of Pennsylvania.

This article has been corrected to clarify Tim Sloan’s tenure at Wells Fargo.