How top leaders at Wells Fargo got the boot

On a Thursday evening in mid-January, a group of top Wells Fargo executives sat down for dinner in an upscale surf-and-turf restaurant near the White House. At nearby tables, power brokers ate seafood on ice and sipped cocktails out of copper mugs.

The Wells Fargo executives — including the chief executive, Timothy Sloan, and the finance chief, John Shrewsberry — enjoyed their crab legs, but they were in Washington on unpleasant business. The Federal Reserve planned to impose tough sanctions on the San Franciscobased bank for years of misconduct and the shoddy governance that allowed it.

The executives’ mission, according to three people directly involved in the negotiations, was to avoid further shaking investor confidence in the bank and its management team.

Officials at the central bank had a different goal, according to people familiar with their thinking. They wanted to send a message to the Wells board that it would be held responsible for the company’s behavior.

After three weeks of frenzied negotiations, a deal was announced Friday night that represented a milestone in the evolving relationship between regulators and banks. Wells Fargo, one of the country’s largest banks, was banned from getting bigger until it can convince regulators that it has cleaned up its act.

“We cannot tolerate pervasive and persistent misconduct at any bank,” Janet Yellen, the Fed’s chairwoman, said in a statement Friday. It was her last act at the Fed; hours later she finished her four-year term.

As part of Friday’s announcement, the Fed and Wells said the bank would replace four members of its 16-member board, although the changes weren’t mandated under the consent order.

The settlement is an attempt by the Fed to impress upon banks that their boards of directors should be vigorous, independent watchdogs — and if they fail, there will be consequences. That reflects a shift from regulators’ historically hands-off approach to corporate boards, and the boards’ role is likely to grow in importance as regulators appointed by President Donald Trump and Republicans in Congress generally loosen the reins on big banks.

Yellen’s successor, Jerome Powell, was the top Fed official overseeing the negotiations with Wells Fargo, and he is likely to maintain the Fed’s emphasis on holding bank boards accountable.

“Across a range of responsibilities, we simply expect much more of boards of directors than ever before,” Powell said in a speech in August. “There is no reason to expect that to change.”

This account is based on interviews with six people involved in or briefed on the negotiations, representing both the bank and the Fed, who were not authorized to speak publicly about regulatory matters.

Wells originally got into trouble in 2016 for charging millions of customers for bank accounts they did not want and for auto insurance they did not need. The bank was repeatedly penalized and fined by regulators.

Executives had convinced themselves last year that they were out of the woods, according to the people familiar with their thinking, who weren’t authorized to speak publicly about interactions with regulators. But that illusion was shattered in September, when Yellen said the bank remained under investigation.

In early January, Wells officials heard from the Fed that the central bank planned to impose stiff new penalties. Executives were furious that the proposed sanctions seemed more draconian than those imposed on banks that nearly cratered the global economy a decade earlier, according to people familiar with the thinking of top bank executives.

Then, on conference calls and face-toface sessions in Washington, the negotiations began.

One crucial participant was Wells’ general counsel, C. Allen Parker. His advantage was that he was new to Wells, not part of what one bank adviser called the “ancien regime.” He joined last spring after more than two decades at Cravath, Swaine & Moore, the whiteshoe law firm where he had been the presiding partner.

Another was Elizabeth Duke, a former Fed governor, who became chairwoman of Wells’ board last summer, well after the account-opening scandal came to light.