Discussion 9
On September 13, 2021, Senator Elizabeth Warren sent FED Chair Jerome Powell a letter [PDF].
In 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 more than 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 current 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 consumer bank subsidiary from its other financial activities.
Wells Fargo is an enormous financial services company with $1.9 trillion in assets. It serves 1 in 3 U.S. households and 10% of U.S. small business.
In Well’s Fargo’s reply, it cites progress achieved under the new CEO, Charles Scharf, including:
- Three business group have been split into five.
- It has created four new functions to provide greater oversight and transparency.
- It has brought on board 10 new operating committee members out of the total committee of 17.
- It has created a new team design to facilitate oversight of consumer practices.
- It has created new enterprise-wide risk assessment with the intent to design new controls.
- It has “implemented a new incentive plan for bank branches that is governed by stronger oversight and controls, and focused on customer relationships.”
Instructions
The Fed continues to maintain that Wells Fargo has not done enough to rein in the incentive failures that revealed the frailty of its corporate governance. We have seen that several of the largest conglomerates in the United States have decided that it is time to divide their agglomerated groups into smaller units for focus and function. Johnson & Johnson will separate its consumer products division and its pharmaceutical division. GE will divide into three units: aviation, energy, and healthcare. Is it time for Wells Fargo to separate its consumer banking business from its other enterprises?
Address the following in your discussion post:
- What is the principal-agent problem?
- What is the role of corporate governance?
- How is corporate culture different than governance?
- Can incentive systems align culture with governance?
Discussion 10
Context
This week’s discussion will provide you with an opportunity to apply Froeb’s analytic method.
Keep the following in mind:
- Who made the bad decision?
- What information did they have? Was it good, bad, or unclear?
- What was their incentive?
Instructions
Read the following and then respond to the discussion prompt:
- Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD.
Address the following in your discussion post:
- What incentive conflict was being controlled by these loyalty payments?
- What advice did Intel ignore when they adopted this practice? (Consider how the Robinson-Patman Act applies to their practice.) Speculate why Intel ignored the advice.
