Time for Equity Analysts, States and Individuals to Re-Think Their Wells Fargo Recommendations

The horses are out of control

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Wells Fargo (WFG), the nation’s third largest bank, which generates over $5 billion in earnings per quarter, could soon be charged with securities fraud as a result of its scheme to surreptitiously open new accounts for unsuspecting customers.

Equity analysts turning a bind eye to corruption.
Equity analysts turning a bind eye to corruption.

While news reports say the fraud was widespread and was known to the bank’s top executives, news of this unprecedented scandal has not dented the recommendations of securities analysts who cover the bank.

As of August 23, shares of Wells Fargo have been rated as “Buy” from 6 Analysts. 1 analyst suggested “Sell” for the company, and 11 analysts have rated the company as a strong “Hold.” “Underperform” ratings were given by 3 analyst and “Outperform” rating were given by 11 analysts, according to Street Updates. The corporation has a Mean Rating of 2.44 based on the Reuters Analysts’ consensus issuing ratings.

So What’s the Problem?

Equity analysts live in their own world which often is devoid of the ramifications of unethical and illegal business practices. How else can you explain the “Buy” ratings from analysts?

The analysts have maintained their overall positive views of the Wells Fargo fraud of opening up to two million unauthorized customer accounts despite the following:

  • As a result of opening accounts without their own customer’s permission, the bank agreed with regulators to pay $185 million to settle charges that fee-generating accounts were opened for unsuspecting customers by employees looking to hit sales targets and bonuses, as reported by CNBC.
  • Wells Fargo CEO John Stumpf was then called before the House Financial Services Committee at a hearing about the millions of fake bank and credit card accounts, as well as claims that the bank retaliated against whistleblowers.
  • Separately, Wells was fined $20 million by the Office of the Comptroller of the Currency (OCC) for illegally repossessing cars from 2008 to 2015 owned by soldiers. This practice broke three provisions of the same law covering protected military service people by denying service members certain banking protections, including capping their interest rates at 6%, according to CNN Money. Those violations began in 2006, the OCC said.
  • Wells is facing lawsuits from shareholders, former employees and customers.

So given all this, how can highly-trained CFA equity analysts consider Wells Fargo a “Buy”

The horses are out of control
The horses are out of control


The answer is that equity analysts don’t consider the social implications of the businesses they cover. It is all done from a myopic financial perspective, or what the economists term “an externality” or event that is outside of their analytical purview.

This is why analysts with any ethics should create a new category of recommendation in addition to their traditional “buy,” “sell,” and “hold” recommendations.

What Should States, 401(k) Managers and Individuals Should Do About Wells?

It’s pretty evident that Wells Fargo has gone off the rails when it comes to ethical business practices. This means states should re-evaluate their relationships with Wells.  Individuals and 401(k) account managers and participants who have anything to do with Wells should also break their relationships with the bank.  It’s clear that an financial institution which has already proven that it is victimizing unsuspecting customers will only turn on other unsuspecting customers, such as 401(k) participants.  Closing accounts with Wells is a prudent thing to do.  Otherwise, existing Wells clients should only suspect they will be victims in the future.

I don’t have high hopes that a company that makes $5 billion in earnings per quarter can change its culture overnight.  Momentum, high salaries and an out-of-control sales culture mean that many people at Wells profited from these illegal schemes.  Their attitude is that they don’t want to sustain a decline in their salaries and bonuses if a customer can be made to suffer.  This means the corporate culture has to change, but the business case studies on this topic are very rare. I don’t know of any that have been successful.

This means states and individuals have the power here to protect their own accounts.  Similarly, analysts should create  a “nationalize” recommendation for corporations that violate the public good and operate without any concern for the nation and their own customers.

This new recommendation will benefit the American public. Wells Fargo may be too big to fail, but it should not pollute the business community with its widespread securities fraud.


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