Why Wells Fargo Should get the Death Penalty
I love a good bank drama. Watching executives get called up to Capitol Hill and watching question after question fired at them and seeing them squirm; it’s great fun. I’m by no means anti-banking though. I went to school for economics and even got offered a job at a boutique firm up in NYC as an investment analyst. I even refuse to use mobile deposit and avoid drive-thrus if possible because I just enjoy the face-to-face interaction of a bank visit. Frankly, I just find it amusing to watch a guy making $6Million a year try to justify a crooked action that needlessly cost people, and cities, money.
Thus, when Wells Fargo got busted for their most recent lapse in judgment I got giddy with excitement. This hasn’t been a good year for Wells Fargo after getting smacked with two other settlements this year. However, this new one is a little disappointing because there was really no reason for it. Wells Fargo, in an attempt to reach their sales quotas, was conducting fraud by opening unasked for customer accounts and then closing them shortly after. It was purely a numbers game.
The Real Deceit of Wells Fargo
Wells Fargo just settled with the Consumer Finance Protection Bureau for $185 Million. Wells Fargo also fired 5,300 people for an account scam that spanned two million different accounts and five years. So, here’s what was happening.
Wells Fargo executives were known for their aggressive sales goals and sweet bonuses for reaching the goals. The problem was that their goals were just a bit too high and the pressure to hit them made the work environment toxic. In order to make these sales goals, bankers opened imaginary accounts with friends and families’ names. Sometimes they used fake aliases. In order to provide email accounts, there are even reports of a “email@example.com” being used. Over five years, Wells Fargo employees did this over two million times to meet sales numbers.
What’s worse is that in order to make these accounts the bankers had to transfer funds from existing accounts. Many times, the money was transferred, the account confirmed, and then closed without a hitch. Other times, they would transfer the money and the owner would use funds they thought they had resulting in an overdraft. In some cases, the bank would refuse to refund the money.
What’s sick is that this opening and closing of accounts wasn’t a money maker. It was just a quota maker.
Why Wells Fargo Deserves the Death Penalty
That’s right, I said it. Wells Fargo has earned the death penalty. This year alone they’ve been hit with this $185Million penalty, a $4Million settlement for predatory sales and fees on college students, AND they were hit with a $1.2Billion penalty for underwriting mortgages they knew did not comply with federal regulatory standards. To be fair, that last one was issued against all of the other major banks; the difference with Wells Fargo’s penalty is that it was the largest and they were required to admit guilt.
Wells Fargo is one of the largest banks in the nation. Before this incident they were in fact the largest by market capitalization. However, it’s their size combined with the nature of the infraction that serves my opinion. They opened fraudulent accounts which is despicable, but they also cross-sold complex products to people who didn’t understand or need them. They have a consistent history of showing that the people they serve aren’t worth servicing. Wells Fargo has essentially grown larger than its purpose. That is, to take in deposits and use those excess reserves for lending and investment banking purposes. Rather, they have decided to conduct those activities – unethically – and then on top of it engage in deceitful and illegal activities to increase their bottom line.
Cash Flow Celt’s Ideas on How to Stop Bank Fraud
The economics of illicit activities is surprisingly simple. If revenues for doing the illicit activities are greater than penalties/fines + loss in brand multiple, then they should conduct the activity. Period. In this case, it’s hard to determine how much revenue these cross-selling and fraudulent account openings actually made. Spanning over five years, and multiple products, creates that difficulty. However, the fine itself is only 3% of Wells Fargo’s second quarter profits – not revenues. Realistically, they may only lose 1-2% of their total deposits if that. We’re talking a one-time $185Million penalty, plus maybe $300Million a year for the next few years. Pocket change.
In order to provide an adequate deterrence for committing illegal activities, the penalties must be equal to or larger than the revenue generated by the activity. They must also be larger than a firm’s ability to simply budget for fines as a cost of business. If $1 of illegal activities results in $2.50 in fines and costs (remember, the firm still has to pay salaries and benefits to these employees), then the firm is actively dissuaded from engaging, purposefully, in illegal activity. In order to actually gauge the scope of activities, the fines can go towards paying for auditors and compliance regulators. Any excess fines can go into a reserve fund that is earmarked for just infrastructure grants, or I don’t know, a national fiber optic grid.
I’m actually against the break-up of banks, although I do actively promote local credit unions over major depository institutions. Banks provide an excellent service extending credit to local and international companies. The larger the bank is the more they can spread risk and consequently, lower the price of lending. Large banks also have a natural competition regulator through the Federal Reserve. If Bank A tries to overcharge for their loans, a loan seeker can simply go to another bank. Even if Bank B doesn’t have the deposits available to make the loan, they can get an overnight loan from the Federal Reserve, at the federal funds rate, and then sell it to the loan seeker at actual market prices. That process, by the way, is called interest rate arbitrage. It’s the same reason why people take loans to pay off credit card debt.
Ultimately though Wells Fargo conducted in such consistent activity that they’ve shown they can’t be trusted. Like I said earlier, the account openings weren’t making tons of money. They were doing illegal things just to make year-end bonuses. That’s about as vapid as it gets. To add the double cherry on top, Wells Fargo John Stumpf said they “don’t want a single dime of improperly earned money” and says this activity isn’t indicative of the corporate culture. Yesterday, Carrie Tolstedt retired from Wells Fargo and her position as President of Community Banking – the department at the heart of the controversy. She leaves the company on a cloud made up of $125Million in Wells Fargo shares, restricted and unrestricted. It seems the CEO couldn’t be bothered to penalize the woman in charge of getting the bank fined. Nor do I see him donating billions of dollars to the country in an effort to rid Wells Fargo of “improperly earned money.” Tough talk from a tiny man. Hopefully Wells Fargo rests in pieces under the teeth of the Dodd-Frank Act. But I won’t hold my breath.
Readers, do Wells Fargo’s actions incite as much anger in you as it does me? As the Cash Flow Celt, I do want my readers to conquer their financial empires. However, I want them to conquer through knowledge – not underhandedness. That’s why I encourage you to check out what a good credit score does for you or how you too can make money with common sense investing tips. You should also like my Cash Flow Celt Facebook page to stay abreast on all of my articles!