A bad day on Friday for Wells Fargo (WFC 59.26, -4.81, -7.5%) got even worse after the close when the Federal Reserve issued a supervisory edict that restricts the bank's growth until it can demonstrate that it has sufficiently improved its governance and controls.
It is an embarrassing rebuke of Wells Fargo and its Board of Directors, which critics of the Federal Reserve might argue took longer than it should have.
Janet Yellen enunciated the enforcement action in one of her last official acts as Fed Chair.
The terms of the supervisory order stipulate that Wells Fargo cannot grow any larger than its total asset size as of the end of 2017 until the Federal Reserve concludes Wells Fargo has made the necessary governance and risk management improvements.
The Board of Wells Fargo has been given 60 days to submit a written plan that outlines how it is going to enhance its effectiveness in carrying out the Board's oversight and governance of Wells Fargo, as well as its compliance and operational risk management program, in such a way that is acceptable to the Federal Reserve.
This supervisory order is the consequence of Wells Fargo having engaged in improper sales practices, which included opening millions of unauthorized retail customer accounts between 2011 and 2015, as well as charging hundreds of thousands of borrowers for auto insurance they did not need.
The restriction on growth will remain in place until the Federal Reserve determines the changes made by Wells Fargo and its Board of Directors are acceptable.
In other words, it is an open-ended date as far as any resolution is concerned, which is problematic for Wells Fargo at a time when the economy is improving, the yield curve is steepening, and loan demand should be improving.
The risk for the bank is that it will lose market share as competitors that don't face any such growth restrictions move in to fill the demand that Wells Fargo cannot meet due to the supervisory order. That understanding is taking a heavy toll on the stock today.
Several analysts have downgraded WFC in the wake of the Federal Reserve's growth restriction.
Wells Fargo should ultimately emerge as a sounder bank because of the compliance and risk management issues it is being forced to address. That understanding could help stem some of the bleeding in the stock, particularly if its largest shareholder, Berkshire Hathaway (BRK.B 205.08, -4.04, -1.9%), voices its continued support of the company.
For now, though, Wells Fargo is suffering the consequences of its misguided sales practices.