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The Federal Reserve's Extraordinary Wells Fargo Growth Restriction

Erich Reimer profile picture
Erich Reimer


  • In an unprecedented action, the Federal Reserve will limit Wells Fargo's asset growth until the bank sufficiently changes its management culture and risk control procedures.
  • Wells Fargo estimates this may end up reducing its earnings by $300-400 million this upcoming year, although how long the Federal Reserve's order will last remains uncertain.
  • The Federal Reserve also is requiring that 4 members of the 16 member board be replaced. The bank's shares fell almost 7% in post-market trading on the news.
  • The sanctions are in response to Wells Fargo's inability to properly fix its internal culture and practices over the past few years amid multiple consumer abuse scandals that have repeatedly come up.
  • While temporarily restrictive, the sanctions may result in Wells Fargo getting the turnaround it needs to finally get out the fake accounts mess that's been dragging it down over the years.

The growth restriction implemented by the Federal Reserve on Wells Fargo (NYSE:WFC) will likely moderately restrict the bank's profits for the immediate future, yet may preserve the bank's long-term growth and stability once its systematic internal problems have been cleaned up.

After years of dealing with the fallout and seemingly unending turmoil from the fake accounts scandal, Wells Fargo may now finally have the concluding note it needs to have a fresh start and begin on the path to long-term growth once again.

However, risks remain, particularly if Wells Fargo does not comply properly with the Federal Reserve's plan and thereby continues the drudgery it's been in for the past few years.

An Unusual Sanction: Asset Growth Restriction

On Friday, Janet Yellen's last move as Federal Reserve Chair was to oversee the implementation of quite significant and restrictive sanctions against Wells Fargo for its "widespread consumer abuses and compliance breakdowns." The sanctions will require the bank to replace 3 of its current 16-member board by April, along with replacing an additional member by the end of the year.

However, even more notably, the Federal Reserve has required each member of the board of directors to sign a cease and desist order affirming that the bank's total asset size would not grow any bigger than it was at the end of 2017.

The growth restriction is historically unprecedented and has never been implemented in the history of Federal Reserve banking governance. The restriction will remain in place until "governance and risk management" improves to the Federal Reserve's liking.

Given the bank's diversified asset base and the Federal Reserve's statement that "current activities" such as accepting deposits and issuing loans would not be halted, it is unclear exactly what the specific details of the asset restriction would be.

Nonetheless, Wells Fargo has estimated

This article was written by

Erich Reimer profile picture
I primarily write on cryptocurrencies and other frontier technology topics. I hosted "Tech Investment Insights" here at Seeking Alpha, exploring emerging technologies with some of the world's most innovative corporate leaders and entrepreneurs. My professional background is in public policy, financial regulation, and the business side of the technology sector. I'm a licensed lawyer in the District of Columbia and the State of New York. I earned my Bachelor's degree from the University of Pennsylvania, to include training at Wharton, and my law degree from the University of Virginia.

Analyst’s Disclosure: I am/we are long KBE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (31)

The fed should not have this power, WFC should have recourse thru the courts. Proof positive that the fed has too much power and should probably be disbanded.
"In an unprecedented action, the Federal Reserve will limit Wells Fargo's asset growth until the bank sufficiently changes its management culture and risk control procedures."

Not totally unprecedented as there are the changes made after the financial crisis. The last time I looked at NYCB a couple years ago they were restricting their own growth because of regulations. This is enough to make one go hmmm but not necessarily a bad thing if you adjust your expectations for the stock accordingly. This might be better than giving them a fine.

With regard to Wells Fargo I hope they get things fixed and customers are treated with respect.
Surprisingly Janet and her Fed did not impose any fines on WFC so this tells you that everyone wanted to get this done, move on and close the scandal. I bought some this morning too. Thank you Janet.
banmate6 profile picture
My 1st reaction is that this is selective justice and, therefore, wrong. I get punishing transgressions. But go after the individuals, as opposed to hurting the livelihood of innocent employees and, yes, shareholders.

Somebody approved malevolent practices like opening fake accounts. In a day of advanced technology, this should be easy enough to identity. After such people are punished and practices reformed, let the company continue to fairly compete and make money.

The hypocrisy stands out. How much punishment was meted out to investment banks, real estate firms, and so for the crash of 2008? How about insiders consistently pumping while selling shares, only to produce a horrible earnings report?

At least WFC admitted to and has been in the process of cleaning itself up. I bought on such catalysts. I still have a very solid CAGR. But it seems knee jerk, selective, and unfair to restrict them now from growing assets...which is like an attempted death penalty.

We will see.
AutoTech profile picture
Almost undetectable hits to the bottom line, but the larger problem is the number of truly irritated Wells customers (my wife included) out there. Their customer service, responsiveness (per my wife and her business associates) gets a solid D (for dismal) grade. Apparently, many feel the same way:

banmate6 profile picture
This is true. I too have had some bad experiences with WFC. They tried to sell me an expensive load, while giving a business partner a break on a joint venture. He had done business with them previously and was trying to profit at my expense. Suffice it to say, I rejected the loan and learned something about my business partner.

Culture matters. No doubt. But WFC is taking measures to change that. Again, I don't think they deserve a death penalty in this context.

Meanwhile, collusion occurs between analysts, ibanks, property management, venture capital, and insiders. Riding grey area law. The authorities could move here, but don't.

It is what it is. I'll just be alert and respond as I can. I may put in some stops now.
ote profile picture
Good time to pick up long term hold.
WFC banky spanky , no pain! Way to go, creates foundation for other mis-behaviour. Outcome is good for WFC
I didn't know the Federal Reserve had the legal authority to do something like this.
Sensible Investor profile picture
Wells Fargo could end up in a death spiral due to a crisis of confidence. That has happened before, to other, supposedly healthy banks. I'd be a proponent of breaking up WFC, rather than this restrictive nonsense.
Buffett probably loading up at prices below $60.
Usually the Compliance Department at a bank holds a lot of power. I wonder what went wrong at Wells Fargo (WFC).
An individual commits fraud, they go to prison. A bank does it systematically affecting thousands and they dont get any new toys to play with. Something is wrong with this world.
Will wait a few days then start buying WFC up. In this world of rising rates and inflation, WFC will thrive once the dust settles. In time this issue will pass, and the price will start to climb again
Yes, i noticed the same thing, almost all the articles on stocks in my portfolio, and PRO subscriber only. This is getting ridiculous, time to start looking elsewhere i guess
Thanks, I'm not imagining it. This is not a trend I like. I mean, I do like SA articles but on the other hand I certainly don't view this stuff as prophetic and the suggested $30/mo charge for Pro is steep.
Okay not all of them -- after further research I found that some authors I liked such as Ray Merola recently "went Pro", while others such as Doctorx are still largely available.
ConservativeOutperformer profile picture
Exactly. As if 95% of the articles here aren't junk... LOL. Since this is a business valuation site, I can say with certainty that this is a terrible business move. I've already cut my reading on this site down noticeably since the change... If the majority of content disappears, so will I. And so will many of the other readers on this website. "But, but it's a business we need to charge for our services....!!11" The value of this website is the users, the commenters. They aren't married to this place. And, if they feel like they are being nickel and dimed, they'll just leave. Most importantly, if the good ones go, this place just becomes another Geocities. Destined to be relegated to the "remember when" conversations....

I do have a question related to the asset ceiling the Fed has imposed on Wells Fargo... How exactly is this going to get implemented or work? I mean I am still going to deposit my paycheck into my WFC account every week. Essentially, the bank can't make loans against it, at least temporarily. As soon as the ban is lifted, and they have a bunch of new deposits sitting there to loan against, doesn't it mean they're just going to loan against it then? I mean, sure they can't do anything for awhile. But there could be a waterfall of business that comes back in the 2 quarters or so it takes to get that business back.

I guess my point is, I understand this is a loud, drastic move the Fed took, but what is the real punishment here? Other than the equity taking a dump temporarily?

Good luck!
Anyone else noticed recently that a lot of SA articles have become locked? I guess you have to agree to subscribe to SA Pro which is not cheap..
Old Professor profile picture
What does that mean--"locked"?
They seem to get locked after a few days. Okay to read fresh stuff but no looking back to the archived material.
if you are not paying them for Pro, then after 10 days you can no longer read the articles, seeking alpha isnt what it used to be...
Truth fan profile picture
300m-400m is a drop in the bucket. This will pressure the management to quickly resolve the consent order and increase shareholder capital return (as disclosed in the managements after-hours calls). The volume after the news broke is light so I suspect there were panic selling. Buy the dip if markets offer you discount today. Wells is under-earning it’s normalized earning power given the outsized 4bn legal provision expense and the fallout from the scandals. It will return to its normalized earning power once all this passed and I won’t be surprised if its shares trade in the 80 range once Fed lifts its ban and GDP takes off to the 3%+ after the effect of tax cut takes in.
Lots of price cuts coming in on the stock. From $2-$11 depending on who you believe. Interesting part it that it is down $8 from Friday’s open. That’s $26 billion in market cap. Seems a bit steep considering this could be a new beginning after they put this behind them.
Bad math, more like $36 billion.
Truth fan profile picture
Agree. It's very steep. WFC sold out couples of times last year and it then rallied back up. Take advantage when sell-side analysts offer us a discount.
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