Wells Fargo Stumbles Again

By John Maxfield Markets Fool.com

It's time for Wells Fargo to get up and brush itself off... again. Image source: iStock/Thinkstock.

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When it comes to the relationship between Wells Fargo (NYSE: WFC) and bank industry regulators, things are going from bad to worse.

New sanctions on Wells Fargo

The Federal Reserve sanctioned the California-based bank on Tuesday for failing to remedy problems with its 2015 resolution plan, which is designed to map out how Wells Fargo would be resolved in the unlikely event that it goes bankrupt.

The bank's so-called living will, mandated by the Dodd-Frank Act, didn't adequately address two of three deficiencies the Fed identified in April, when it required Wells Fargo, along with four other banks, to resubmit their latest living wills because of shortcomings.

"The agencies jointly determined that Wells Fargo did not adequately remedy two of the firm's three deficiencies, specifically in the categories of 'legal entity rationalization' and 'shared services,'" states the Fed's press release. "The agencies also jointly determined that the firm did adequately remedy its deficiency in the 'governance' category."

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Wells Fargo is now subject to a new set of sanctions. It's barred from "establishing international bank entities or acquiring any non-bank subsidiary" until the issues are resolved to the satisfaction of regulators.

After trading higher during the normal trading session on Tuesday, shares of Wells Fargo dropped in after-hours trading following the Fed's announcement.

Going from bad to worse...

The misstep is bad in and of itself, particularly since the other banks that resubmitted their plans didn't run into similar problems. What makes it worse, however, is that it comes on the heels of Wells Fargo's sales-practice scandal, disclosed by the Consumer Financial Protection Bureau in early September, in which thousands of the bank's employees opened millions of fake accounts for customers in order to meet unreasonably high sales goals.

The initial fallout from the scandal seemed manageable -- Wells Fargo even went so far to say at the time that it was immaterial. It paid a $185 million fine, less than 4% of its quarterly earnings, and was required to hire an independent consultant to conduct a thorough review of its sales practices. Aside from the much more meaningful reputational damage suffered by Wells Fargo, these were little more than slaps on the wrist.

Two months later, however, the Office of the Comptroller of the Currency doubled down by imposing sanctions related to the sales practices. Under the OCC's restrictions, which are presumably still in place, Wells Fargo must seek prior written notice of a change in directors and senior executive officers. The bank is also now limited in its ability to offer its executives golden parachute payments -- i.e., lump-sum payouts that kick-in if an executive is fired or in the event of a qualifying merger or acquisition.

None of the restrictions in either set of sanctions will bring Wells Fargo's otherwise highly profitable operations to a halt. However, for shareholders in the bank, the added damage to its reputation, and the seemingly thorny relationship with regulators, certainly aren't auspicious signs.

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John Maxfield owns shares of Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.