• by Thom Forbes  @tforbes, February 5, 2018

The Federal Reserve Board excoriated San Francisco-based Wells Fargo on Friday for its “widespread consumer abuses and compliance breakdowns” while releasing a consent order that, among other actions, puts a curb on the bank’s growth until it gets its behavior under control and requires that four of its board members be replaced. 

“Wells Fargo says Federal Reserve sanctions on the bank after a fake accounts scandal and other problems could reduce the embattled bank's profits by as much as $400 million this year,” Kevin  McCoy reports for USA Today. 

“While its banking industry rivals grown, the Fed sanctions will hold Wells Fargo's total consolidated assets to the $2 trillion level measured as of Dec. 31, 2017. Three current board members will be replaced by April, and a fourth will depart by the end of the year,” McCoy continues.

“We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again. The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers,” Fed chair Janet L. Yellen said in a statement late Friday that was, in effect, her swan song. 

Yellen’s replacement as chair, current Fed governor Jerome Powell, will be sworn in today. 

“Wells Fargo said complying with the consent order is its number one priority and has already taken steps to get there. It plans to present a plan for improvement to the Fed within two months,” NPR’s Amy Held reports. “CEO Tim Sloan said in a statement, ‘Although one part of the consent order restricts our company's asset growth, we remain financially strong and flexible and are confident we can fully serve your needs.’”

The bank issued a 10-page document on the consent order that summarizes the actions it has already taken, or will be taking, to comply with the Fed.

The agreement was the culmination of “three weeks of frenzied negotiations,” in Washington D.C. that included CEO Sloan and Wells Fargo CFO John R. Shrewsberry,” according to a piece in the New York Times that’s based on interviews with six people with insider’s knowledge of the talks.

On a broader scale, “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 Trump and Republicans in Congress generally loosen the reins on big banks,” write the NYT’s Emily Flitter, Binyamin Appelbaum and David Enrich.

“The Fed just put the fear of God into bank boardrooms across the country,” Ian Katz, an analyst at Capital Alpha Partners, said in a note on Sunday,” Ryan Tracy and Emily Glazer report in the Wall Street Journal. “And that’s exactly what it wants to do.”

“The restriction on Wells Fargo’s asset growth also took the Fed into uncharted territory, and the harsh penalty reflected a judgment that the bank’s board failed to ensure ‘that senior management had established and maintained an adequate risk management framework commensurate with the size and complexity of the firm,’ as the Fed’s enforcement order put it,” Tracy and Glazer continue.

Meanwhile, the “estimable” Powell is facing a formidable challenge as incoming chair “working out how to achieve growth that is both adequate and financially sustainable,” writes former Treasury secretary and current Harvard professor Lawrence H. Summers for the Washington Post. 

“There is a difficult balance to be struck. Except in the aftermath of recessions, it has been a long time since the U.S. economy grew well with a stable financial foundation. History will judge how stable the financial conditions of recent years have been. Prior to that, we were in recovery from the 2008-2009 recession. That in turn was preceded by a period of financial excess in housing and other markets. Prior to that came the 2001 recession and recovery, which in turn was preceded by the Internet and stock market bubbles of the late 1990s.”

Speaking of which, last we checked, the President was not tweeting about the stock market this morning, as has been his wont.