Wells Fargo has a new boss. His first task is taming Washington

The Wells Fargo stagecoach veered off into a ditch more than three years ago. Now it’s up to Charlie Scharf to finally get it out.

Scharf will take over scandal-ridden Wells Fargo on October 21, bringing valuable experience in banking and payments, a deep Rolodex of powerful figures in Washington and the respect of Wall Street.

His background will help Scharf fix a bank that’s been under scrutiny by lawmakers and regulators since the fake-accounts scandal erupted in September 2016. And Scharf’s not-so-secret weapon is the fact that “Wells Fargo” did not previously appear on his resume.

That outsider status makes it easier for him to credibly say that Wells Fargo’s toxic culture has been cleaned up. Former CEOs Tim Sloan and John Stumpf, longtime executives at Wells Fargo, failed to make that case.

“There have been some painful moments on TV for their CEOs,” said Kyle Sanders, a banking analyst at Edward Jones. “If Tim Sloan was still there, he would just be a punching bag for Elizabeth Warren.”

Sloan stepped down abruptly in early March because he felt he was “becoming a distraction.” It took Wells Fargo six months to find a replacement, leaving a rare power vacuum atop one of America’s biggest and most troubled banks.

“Everyone was starting to get nervous they weren’t going to find someone,” said Sanders. “We’re glad they got a talented executive. There’s probably no one with better experience to tackle this job.”

Regulatory headaches won’t go away

Scharf, the former CEO of Visa and Bank of New York Mellon, knows that the Wells Fargo turnaround story begins with chipping away at the bank’s mountain of regulatory problems.

“Just to reiterate the obvious,” Scharf said during his introductory conference call last week, “we have a series of regulatory issues that we need to complete the work on. And so that is clearly the first priority.”

Those “issues” have been driven by widespread allegations that Wells Fargo has abused its customers and employees.

The bank has admitted employees opened millions of fake bank and credit card accounts to meet wildly unrealistic sales goals. Wells Fargo has admitted to forcing borrowers to pay for auto insurance they didn’t need. Some of those auto borrowers ultimately had their vehicles repossessed. Wells Fargo has admitted to illegally repossessing the vehicles of hundreds of service members.

Mortgages have also been a problem at Wells Fargo. The bank has said it charged customers for unwarranted mortgage fees and apparent software glitches caused hundreds of homeowners to lose their homes in foreclosure.

Those and other Wells Fargo controversies have drawn the ire of regulators. Wells Fargo has yet to resolve a trio of investigations launched in 2016 by the Justice Department, SEC and Labor Department.

“There are some potential skeletons in the closet,” said Sanders.

The asset cap is the top concern

More pressing, Sloan failed to convince the Federal Reserve to lift the unprecedented sanctions imposed in early 2018 for “widespread consumer abuses.” Those sanctions prevent Wells Fargo from increasing the size of assets on its balance sheet above $2 trillion.

Federal Reserve officials have said they won’t remove the asset cap until they are convinced Wells Fargo has cleaned itself up.

“There were quite wide breakdowns in risk management which resulted in … mistreatment of consumers that we know was quite harmful to the consumers and to the image of the institution,” Fed chief Jerome Powell said during a press conference last month.

The asset cap is the No. 1 concern among shareholders because if it doesn’t go away soon, the bank may not be able to make the loans required to boost profits.

Analysts say it’s very hard to quantify precisely the damage from the asset cap and strikes against its reputation. But these are clearly negatives.

“They can’t measure the customers that never come,” said Julie Solar, senior director in banks at Fitch Ratings. “The regulatory overhang is a significant headwind.”

Wall Street has punished Wells Fargo for its legal problems.

The stock, once a superstar in the banking industry, has barely budged since the scandals began in September 2016. Shares of rival JPMorgan Chase have climbed about 70% over that span. Bank of America has nearly doubled.

Shareholders are also unnerved by Wells Fargo’s lofty spending. Expenses have been elevated because of the regulatory problems, compliance needs and hefty technology costs. Rival big banks have been tightening their belts, making Wells Fargo’s expense problems more glaring.

Scharf will be under pressure to reverse that trend.

Ken Leon, analyst at CFRA Research, predicted Scharf will consider downsizing Wells Fargo’s capital markets business, perhaps by ditching trading products such as derivatives that require the bank to hold high levels of capital.

“This guy is a cost cutter,” said Leon.

Scharf, like other incoming CEOs, will get a honeymoon period to get his bearings in the new job.

William Klepper, a management professor at Columbia Business School, urged Scharf to use this period wisely by demonstrating Wells Fargo has changed its ways.

“Go back to Congress. Go on the offensive. Don’t wait,” said Klepper. “He’s got a onetime opportunity to become the role model for the changed behavior of the Wells Fargo culture.”