The Wells Fargo 5300

When news broke that Wells Fargo fired 5300 employees and agreed to a penalty of $185 million, it was shocking.   There were three reasons for this shock:

  1. The scope of the fraud was massive
  2. The penalty was, to a bank with a market valuation of $250 billion, the highest of any bank in America, trivial
  3. Of the 5300 employees fired, not one was an upper echelon corporate executive.

Turned out that trench level people were being relentlessly pushed to produce new accounts, new credit cards, anything new that produced new fees, and so they did. Just without the knowledge of the putative account holders, even though they were being charged (or penalized, as the case may be) for these accounts.

Former employees tell CNNMoney that they felt incredible demands from managers to meet sales quotas. The same managers turned a blind eye when ethical and even legal lines were crossed.

“I had managers in my face yelling at me,” Sabrina Bertrand, who worked as a licensed personal banker for Wells Fargo in Houston in 2013, told CNNMoney. “They wanted you to open up dual checking accounts for people that couldn’t even manage their original checking account.”

So they did.

An analysis conducted by a consulting firm hired by Wells Fargo concluded that bank employees opened over 1.5 million deposit accounts that may not have been authorized.

The way it worked was that employees moved funds from customers’ existing accounts into newly-created ones without their knowledge or consent, regulators say. The CFPB described this practice as “widespread.” Customers were being charged for insufficient funds or overdraft fees — because there wasn’t enough money in their original accounts.

Additionally, Wells Fargo employees also submitted applications for 565,443 credit card accounts without their customers’ knowledge or consent. Roughly 14,000 of those accounts incurred over $400,000 in fees, including annual fees, interest charges and overdraft-protection fees.

The sheer outrageousness of this flagrantly fraudulent conduct is impressive on two levels, the first being that they would do such a thing, and the second being that it went so far without anyone putting an end to it. The Consumer Financial Protection Board is not exactly a hero here, for if they were doing their job, this would have been outed and stopped long before it reached this point.

But now that the news is out, that Wells Fargo did this, which Berkshire Hathaway, its biggest shareholder, shrugs off as business as usual,

“Wells Fargo behaves better than the average big bank.” [Berkshire vice chairman Charlie Munger] added that “nobody’s perfect” though.

That’s comforting. And the post-mortem follows, questioning whether the fine was big enough, what rules can be put in place to prevent this from happening again and why no big wig was reduced to headlessness.

While the $185 million seems like a huge number to most people, it’s lunch money to Wells Fargo. But even so, it’s not like some guy who did this will have to dig into his pocket. If the bank had to eat it, it would, but it doesn’t. It will eventually flesh out in fees to customers and taxpayers. In other words, they cheat and the victims, plus the rest of us, pay for it. It will be incremental, so we won’t feel it too, but it will be in there. Raise one point on late fees, or add some small inexplicable processing fee, like $1.79 per month, to a few million customers’ accounts, and you can make back a lot of money.

And rules? They have rules. They have people whose job it is to assure compliance with those rules. The rules have rules, and the compliance people are really good at making customers’ lives miserable by imposing requirements to cover their ass satisfy the rules. But the rules didn’t prevent this massive fraud. So make more rules? Because your life isn’t miserable enough?

Then there’s the big Kahuna, the top corporate executives under whose watch this massive fraud occurred. What about them?

CEO John Stumpf made $19.3 million in compensation in 2015. That makes him one of the top-paid bankers in the United States as he has been for years, along with these others: JPMorgan Chase (JPM)’s Jamie Dimon, Bank of America (BAC)’s Brian Moynihan and Lloyd Blankfein of Goldman Sachs (GS).

Stumpf, and his predecessor Dick Kovacevich, are well-known in banking circles for leading the bank’s efforts to cross-sell, or get customers to sign up for more and more accounts, with Wells Fargo.

It’s that cross-selling concept that gave rise to the fraud, that if they had their teeth deeply embedded in customers’ necks for one product, ram as many new products as possible down their throats. But chances that Stumpf, or any of his C-Suite cohorts, ever said “commit fraud to do so” are slim to none. And when you ask why they aren’t being criminally charged for what happened 97 floors below, it’s because they did no more than say “sell product,” which came out as “create as many fraudulent, unauthorized accounts as possible” on the ground floor. How that happened will likely never be known.

But what if Stumpf’s head should be put on the block anyway, since this happened on his watch? Even if he bears no criminal liability, what about management responsibility? Here’s a tough pill from inside the onion of corporate crime: the board will throw him a party and protect him from the shitstorm with a golden umbrella, but if it should be necessary to let a corporate head or two roll to save the Corporation, that’s just the cost of doing business.

Stumpf will wave good-bye and live out the rest of his days in luxury. And a new CEO will be brought in to sit in his chair. That’s corporate life. Much as they love an executive, they’re ultimately fungible for the good of the corporation. And the Board will demand that the new one produce like the old one. So, you’ve changed the heads but not the body.

For a long time, it’s been understood that none of the incentives that are put into play for individuals work for corporations. Corporate crime and prosecution is aspirational. It may hurt individual executives, but the corporation lives on, unless it’s harsh enough to bring the entire corporation down, Enron-like.

Is the threat of prosecution or discharge in disgrace sufficient to stop executives and managers from committing, or screaming at the groundlings to commit, crimes? Don’t be naive. The likelihood of it happening is small, and the incentive, the bonus for meeting goals, opening new revenue streams, making money, is both certain and huge.

So what’s the cure to this disease? Beats me. A lot of smart people have tried to figure out ways to keep businesses honest, and have come up empty. So we keep using palliative measures that make the public feel as if something is being done, knowing full well that there is no mechanism to stop the greed that induces corporations to engage in conduct that harms people for a buck.

21 thoughts on “The Wells Fargo 5300

  1. John Barleycorn

    Your putative is palliative here, but the eight tents were sexy.

    Naive needs a niece.

    P.S. you should do some sifting and hire one of the recently fired “motivated” to hunt whatever it is that needs hunting. I got a pretty sold sluce box to shake and bathe the heavy from the stones via the first cut personnel purge.

    You need….you will have fun when it dawns on you that it is a great idea. Just imagine someone reading newspapers, especially that newspaper, for you. Hell, you might even have time to buy a new set of fall rims with the perfect tire mounted and ready to go. Clearly cleansing cruising. Everybody needs more of that.

  2. Patrick Maupin

    What Munger really meant is “Wells Fargo is too nice. Maybe we should buy the whole thing and move in some managers from Clayton Homes or Vanderbilt Mortgage to teach them how to run a business.”

  3. maz

    Following that time-honored legal dictum that two wrongs *do* make a right: civil forfeiture. Seize, say, any assets acquired during the period the crime was being committed, along with cash on hand, and let Wells prove none of it represents criminal gains. Ought to make for a few fun months of public affairs television, in any case.

    1. SHG Post author

      Customer: I would like to make a withdrawal.
      Teller: I would like to help, but the govt has frozen our assets.
      Customer: ???

      Seizure might not work out as well as you think.

  4. FLB

    I would quibble with the notion that it’s impossible to convince institutions to comply with the law.

    For example, bank regulators over the past few years have emphasized a sort of “inspector general” approach in large institutions. Units inside the company are supposed to be very knowledgeable about its activities and to catch bad behavior. The idea is for the institution itself to make it difficult to engage in wrongdoing, or at least to avoid being discovered. That being said, there’s a variety of ways to subvert these mechanisms, and it looks like that’s what happened at Wells Fargo.

    The SEC, for its part, has developed a pretty successful whistleblower program. Suppose an employee learns of securities violations — the potential for a whistleblower award may incentivize that employee to talk to the SEC about it. No doubt, there are issues with this mechanism as well.

    These developments make it more likely that (1) to the extent questionable activities occur, there will be reasonably solid records of them; and (2) these records will sometimes find their way to regulators.

    1. Patrick Maupin

      Those programs must reduce the number of accounting errors at banks by around 50%, because all the ones I’ve ever seen are in the bank’s favor.

    2. SHG Post author

      I get the inexplicable sense that as you wrote this comment, you realized how tepid those efforts are. Not all corp execs are dishonest. Not all corps have a culture of fraud and deception. But the question really isn’t whether “it’s impossible to convince institutions to comply with the law,” but whether any existing means serve to prevent corps from breaking the law. It’s a different question.

    3. Frank

      Yes, and with that you get Operation Choke Point, a program designed to cut off not fraud, but the politically incorrect.

      1. Anonymous

        Or maybe Operation Choke Point — the purported motivation for it as well as the libertarian backlash to it — date back to the Roman empire. panem et circenses.

        [Ed. Note: If you want to leave any more comments, use your real email and a handle other than anonymous.]

  5. john Neff

    They should have stayed in the stage coach business. I found that they had changed my account and when I called them to ask why they would not talk to me. I had to talk to an employee of a consultant who I supposed was hired because their staff were skilled liars. After I talked to the consultant I became a former customer. Everything that has happened since then has proved that was the right choice.

  6. D-Poll

    It would never go over, since the Nuremberg defense is “in” in this economic climate, but the only effective way to prosecute fraud like this is to prosecute the employees perpetrating it. The incentives for those interchangeable CEOs start to shift when the employees have enough of a personal stake in the fraud to at least demand “fall-guy”-level payoffs. Not that our justice system can effectively cope with the load, but that’s another blog post entirely.

    1. Patrick Maupin

      It will be interesting to see the Wells Fargo 5300 attempt to apply the Nuremberg defense at the unemployment office and in job interviews.

      There are certainly no heroes in this story, and part of me would love nothing more than to see Wells Fargo on the hook for salaries for these guys for years, but teaching 5300 people dispersed around the country that doing bad stuff (even when told to do so by their asshole bosses) will hurt them in the pocketbook in the end? Priceless.

  7. Dragoness Eclectic

    In the government contracting business, the DoD has a big stick for encouraging contractors to abide by the law. If you’re caught violating procurement regulations or contract provisions, not only does your company lose your nice shiny $$$ contract, your company can be barred from ever competing again for a government contract.

    For corporations, “You lose all your profits and future business” is a much bigger incentive to behave than “some disposable guys get fired/we pay a piddling fine”.

  8. Steve

    I think everyone is missing the real solution here… it’s not regulation. Regulation is a false sense of security for people who are too lazy to think fro themselves. The quickest way to solve the problem is to starve the beast. If you don’t care for the way Wells Fargo is conducting business, take your business elsewhere.

    1. Anonymous

      According to Charlie Munger, “Wells Fargo behaves better than the average big bank.” Many in the industry may well suspect that to be the case.

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