In the spring of 2002, I was lunching with Charlie Scharf in the dining room of Bank One’s Chicago headquarters while reporting a story on Jamie Dimon’s comeback in reviving the ailing midwestern lender, following his famous firing by Sandy Weill at Citigroup. Scharf, then 37, was a rising star at Citigroup as CFO of its Corporate and Investment Bank when he took a flyer by joining Dimon to spearhead a salvage operation at a laggard so broken that many on Wall Street reckoned it couldn’t be fixed. So why did you trade a great job for a jump into the unknown, and a pay cut, I asked. “It wasn’t really a choice,” he replied. “I was just following the best leader I’ve ever seen.”
Seventeen years later, Scharf will soon be competing against the mentor he followed for a quarter-century as the new CEO of Wells Fargo. Scharf isn’t the only member of the fabled Dimon teams to become a financial services titan––Jes Staley and Bill Winter head British banks Barclays and Standard Chartered respectively, and Frank Bisignano served as chief of payments-processor First Data, recently purchased by Fiserv. Scharf himself led both Visa and BNY Mellon. But in his new role, Scharf is the first Dimon protege to become a head-to-head rival.
To succeed, Scharf, 54, will need to marshal all the skills and lessons learned from his friend and hero to accomplish one of the toughest tasks in corporate America, the remaking of Wells Fargo. He’s taking charge at the institution that in just three years has fallen from its pinnacle as the most prudent and arguably best managed of America’s Big Four banks, a group that also encompasses Bank of America, J.P. Morgan Chase, and Citigroup, to a severely tarnished, no-growth franchise that’s hobbled by regulators and widely reviled by customers. Meanwhile, Bank of America, a former basket case, is thriving under CEO Brian Moynihan, Dimon’s J.P. Morgan continues its run as the champ, and Scharf’s alma mater Citigroup, a player that long fell far short of Wells superb performance, is outpacing Wells by showing modest growth in profits under Scharf’s former Citi colleague, Michael Corbat.
Scharf three main challenges: winning the support of regulators unmoved by his predecessors’ reforms, restoring Wells’ reputation with customers, and getting what was once a powerful growth machine moving once again. The source of Wells’ decline is a toxic culture that rewarded its troops for pushing products on customers that they didn’t want or need, and a leadership team that failed to crack down on abuses. The scandal broke in September of 2016, when Wells disclosed that its branch managers and sales people had opened millions of accounts for customers without their knowledge in order to pocket big bonuses. Initially, lower-level managers retaliated against the whistleblowers, and top brass, including CEO John Stumpf, failed to take prompt action. Stumpf left a month later, replaced by 20-year Wells veteran Tim Sloan.
The damning publicity sent new accounts plummeting, and Wells faced multibillion dollar legal bills from employee and shareholder suits. But the news of broken sales practices kept coming. In July of 2017, Wells apologized for charging as many as 570,000 customers for car insurance they didn’t need. A few months later, Wells admitted to wrongly charging fees to a “substantial number” of the 110,000 customers who were hit with charges for failing to close their mortgages on time to benefit from “locked-in” rate. The next month, in November of 2017, the Department of Justice fined Wells for illegally repossessing cars from military personnel. The coup de grace arrived in February of 2018, when the Federal Reserve took the extraordinary step of issuing a consent decree freezing Wells’ assets at $2 trillion, their level at the close of 2017, capping the bank’s growth, and mandating the removal of four directors. The decree will stay in place until what the Fed characterized as “widespread abuses and other compliance breakdowns” are fixed.
Sloan exited in March of this year, replaced by Wells’ general counsel Allen Parker as interim CEO. Stymied by its battered image and the Fed’s strictures, Wells fell from best in class to an under-performer. In 2015, Wells came within a whisker of matching much bigger J.P. Morgan’s $22.5 billion in profits. By the close of 2018, its earnings had fallen eight percent to $20.7 billion. Over those three years, Bank of America doubled its profits to $26.7 billion, surpassing Wells along the way, and J.P. Morgan gained 50% to $30.7 billion. Since the start of 2016, Wells stock has gone nowhere, while J.P. Morgan’s and B of A’s shares roughly doubled.
Since Wells foundered because of a hyper-aggressive sales culture, it’s interesting that Scharf throughout his banking career has successfully championed growth. He’s an expert at enticing branch customers to buy more products, from credit cards to mortgages. But through Dimon, he learned to get the incentives right, and takes a Dimonesque, “let’s assume the worst will happen” approach to risk.
The early days with Dimon
As a senior at Johns Hopkins University in Baltimore, Scharf sent his resume to Dimon, then partnering with Weill and other renegades at a subprime lender in town called Commercial Credit that provided loans to miners, nurses and factory workers. Dimon hired Scharf as a part-timer while he was still at Hopkins, then as a bona fide employee when Scharf graduated in 1986. The Commercial Credit crew were a bunch of rowdy Wall Street refugees striving to build their own empire, including future Travelers and Citi CEOs Bob Lipp and Chuck Prince. “I was the younger than almost everybody else by 20 years,” Scharf noted in the NYU Stern School of Business alumni magazine, “That helped me mature in business faster.”
As Scharf told me during interviews on a Dimon story years later, Commercial Credit looked nothing like his vision of corporate America. “The couches were red velour,” he recalls. “Jamie was known as ‘The Kid’ and had all his unruly hair. He talked into this huge sqawk box like the one in ‘Charlie’s Angels.'” He remembers Weill erupting in fury over the chronically malfunctioning fax machines.
Scharf rode shotgun with Weill and Dimon as they built the universal bank model through a chain of acquisitions including Primerica, Smith Barney, Salomon Bros., and Travelers. The final coup was the Travelers’ 1998 acquisition of Citicorp that created Citigroup. Shortly after the merger, Weill fired Dimon. But Dimon is the ultimate corporate pied piper, and a large cadre of Dimon loyalists, mainly still at Citi, were poised to rejoin their leader when he resurfaced. In March of 2000, Dimon took the reins at Bank One, and Scharf quit his prestigious job at Citi for the CFO position at the troubled bank. Over the next couple of years, Dimon lured another six high-ranking loyalists, most of whom left big jobs at Citi, and would later follow Dimon to J.P. Morgan, Jay Mandelbaum, Jim Boshart, Mike Cavanagh (now CFO of Comcast), Joan Guggenheimer, and Bill Campbell, as well as former Citi CFO Heidi Miller, who’d left to head Priceline.com.
In 2002, Scharf rose to head Bank One’s consumer franchise of 1700 branches. In that role, he helped achieve a bedrock Dimon objective, installing a uniform technology platform across the entire enterprise. Bank One was saddled with a hodgepodge of seven different deposit systems, three clearing networks, and five wire transfer platforms. Dimon and Scharf knit the diverse parts together, helping to minimize back office costs.
After J.P. Morgan bought Bank One in 2004 for $57 billion, Scharf took top consumer job running a giant franchise of over 5000 branches. In a replay of the move at Bank One, he helped to combine mismatched computer systems. He also created strong incentives for selling more products to Chase customers. When he arrived, 50% of the branch managers were receiving bonuses of between $9000 and $18,000. Scharf installed sales targets and quotas what rewarded the best performers with $65,000 payouts, and zip to the lowest quintile, and handed the sales people who achieved the highest volumes bonuses over $100,000. His innovations doubled credit card sales, and led to a big increase in one-stop-shop customers who added home equity loans and mortgages. His go-go approach improved Chase’s loyalty while eliciting none of the abuses seen at Wells.
Scharf also oversaw the acquisition and integration of a major casualty of the financial crisis, Washington Mutual, where he laid off 9200 workers. Dimon’s conservative policies sustained J.P. Morgan through the storm, and Scharf admired the way his mentor spurned the high-risk businesses that sank so many competitors. “There are a lot of things we intentionally did not do, such as CDOs, option arms, etc.,” he told the Stern School magazine, adding that maintaining a “fortress balance sheet” is an essential safeguard.
In 2012, Scharf left the Dimon orbit to become CEO of Visa near San Francisco, the biggest issuer of Chase credit and debit cards cards. Deploying his classic playbook, Scharf lowered processing costs, establishing a new tech development center in India. He also found fresh avenues for growth. He brokered a lucrative new partnership with Chase. The bank created a platform called Chase Merchant Services designed to deliver creative rewards programs to merchants and customers, and as part of the deal, Visa won a 10-year agreement to process the electronic payments forming the backbone of the venture. In four years, Scharf raised Visa’s stock price 135%, lifting its market cap by over $200 billion.
In 2016, he shocked the financial services world by departing at age 51. A native New Yorker, Scharf had frequently been working from his home city, and clearly wanted to return. The following summer, he took the top job at custody provider BNY Mellon, and immediately targeted its excessively large staff in operations. Meanwhile, the Wells board had launched a six-month search for a new CEO, and investors fretted that the banks fallen reputation, and its regulatory quagmire, would force settling for a second-tier candidate. Those fears proved unfounded when Scharf accepted Wells’ offer on September 27, with a starting date of October 21.
For all the lessons he’s absorbed from Dimon, Scharf brings a less emotive, more deliberative style to leadership. Both are highly analytical, and masters of numbers. But where Dimon is outspoken and bombastic, Scharf is cool and soft-spoken, and almost scholarly in his approach. Colleagues describe him as “all business,” implying the emotional quotient at Wells will be a lot lower than that the raucous shouting matches he lived through at Commercial Credit and J.P. Morgan. “Good business is all about stepping back, asking questions, accumulating the expertise to make the best decisions,” he said in the Stern alumni magazine interview, “There’s always an answer waiting to be found. You just need to do the work and seek it out.”
The big question is what overarching strategy Scharf deploy. In a phone interview with analysts, he gave few specifics, saying simply that “the first priority is to get the regulatory issues behind us.” That’s essential to clearing the way for the two goals Scharf typically targets, raising sales without shouldering big risks, and slashing overhead and processing costs. Judging from Scharf’s approach in the past, he’ll want to restart sales in a big way, and won’t be discouraged that a growth obsession got Wells in trouble. It wouldn’t be surprising to see Scharf install the same kinds of incentives, this time sound incentives, that boosted branch revenues at J.P. Morgan. The Fed’s regulatory straightjacket is also forcing Wells to absorb high costs for compliance that would disappear if Scharf can convince them that Wells has fully reformed.
It’s easy to see why Scharf took the job. Despite its problems, Wells remains one of America’s most profitable companies, and its stock price, at a PE of around 10, is depressed, meaning investors don’t expect much improvement. A new Wells that’s growing again, at peace with regulators, and regaining the trust of customers would prove a strong rival to B of A, and Dimon’s J.P. Morgan. The man who was Dimon’s twenty-something assistant is now playing in the big, big leagues dominated by his legendary former boss.
We’ll soon see if the student is a match for the teacher.
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