course material

1. Context On September 13, 2021, Senator Elizabeth Warren sent FED
ContextOn September 13, 2021, Senator Elizabeth Warren sent FED Chair Jerome Powell a
letter
https://www.warren.senate.gov/imo/media/doc/Letter%20from%20Senator%20Warren
%20to%20Fed%20on%20Wells%20Fargo%20FHC%20Status%2009.13.2021.pdfIn the
letter she wrote “Under Janet Yellen’s leadership, the Fed placed Wells Fargo under an
asset cap in 2018 due to its ‘widespread consumer abuses and other compliance
breakdowns. In the three years since then, numerous additional revelations have surface
about Wells Fargo’s continued unethical and anti-consumer conduct. These
new revelations have once again made clear that continuing to allow this giant bank with a
broken culture to conduct business in its correct form poses substantial risks to consumers
and the financial system.” Senator Warren goes on to ask that the FED revoke Wells Fargo’s
status as a financial holding company. The action would require Wells Fargo to separate its
bank subsidiary from it other financial activities.Wells Fargo is an enormous financial
services company with $1.9 trillion in assets. It serves 1 in 3 US households and 10% of US
small business. In reply to Senator Warren’s demand Well Fargo replied,
https://newsroom.wf.com/English/news-releases/news-release-details/2021/Wells-
Fargo-Affirms-Focus-on-Building-Strong-Risk-and-Control-Foundation/default.aspxIn it’s
reply it cites progress achieve under the new CEO Charles Scharf, including: 1) three
business group have been split into five; 2) it has created four new functions to provide
greater oversight and transparency; 3) it has brought on board 10 new Operating
Committee members out of the total committee of 17; 4) created a new team design to
facilitate oversight of consumer practices; 5) created new enterprise wide risk assessment
with the intent to design new controls; 6) “Implemented a new incentive plan for bank
branches that is governed by stronger oversight and controls, and focused on customer
relationships.” Emphasis added by Dr. Isley.InstructionsThe FED continues to maintain that
Wells Fargo has not done enough to rein in the incentive failures that revealed the failure of
it corporate governance. We have seen that several of the largest conglomerate in the US
decide that it is time to divide their agglomerate groups into smaller units for focus and
function. J & J will separate it consumer products division and its
pharmaceutical division. GE will divide into three units; aviation; energy,
and healthcare. It is time for Wells Fargo to separate it’s banking business from it’s other
enterprises? YES NO ExplainWhat is the principal-agent problem? What is the role of
corporate governance? How is corporate culture different than governance? Can incentive

2. systems align culture with governance? How might separating Wells Fargo’s banking
business from it’s other enterprises improve depositor safety?