What's going on?

Wells Fargo, until recently, was the most valuable bank in America, but that changed when its stock sold off in response to a scandal involving illegal sales practices. On Wednesday, the bank announced it would take back $41 million of its CEO�s previous pay (that�s a lot!).

What does this mean?

Wells Fargo, a major force in US retail banking (mortgages, bank accounts, etc.) was for many years the darling of the American banking industry. While other banks with huge �investment banking� businesses (e.g. trading stocks or advising companies on mergers and acquisitions) struggled in the wake of the 2008 financial crisis, Wells Fargo was a consistently profitable provider of banking services to individuals and small businesses. However, it turns out that the bank�s revenue was being juiced by employees routinely opening additional customer accounts and taking out new credit cards without permission. The new accounts were hidden from customers, who were fraudulently charged for the extra services.

Why should I care?

For the stock: This scandal is likely going to be expensive, especially for the bank�s reputation.
Wells Fargo was fined $185 million by the US government and is facing lawsuits. While the potential monetary cost will be significant but not massively damaging to the humongous bank (though this could change), the reputational damage could be more problematic for future profits.


The bigger picture: The ability to �clawback� pay is supposed to de-incentivize bad behavior.
Many think that one of the root causes of the 2008 financial was the culture of paying big annual bonuses to bank employees. The thinking is that it incentivized short-term behavior to the detriment of the long-term interests of the banks and the financial system. As such, there are now provisions that allow banks to take back pay if actions from previous years come back to bite which, in theory, make this sort of behavior less likely (although apparently not in Wells Fargo�s case).