Sandbagging Customers for Fun and Profit

John Stumpf, the CEO of America’s most profitable megabank, sent me an email earlier this week. Imagine that.

The bank Stumpf runs, Wells Fargo, has 268,000 employees. Stumpf must be a very busy man. Especially these days.

Wells Fargo has been operating in crisis mode ever since the federal Consumer Finance Protection Bureau hit the bank earlier this month with a $185-million fine, the largest penalty the new agency has ever assessed.

What prompted this sizeable ding? Wells Fargo employees, CFPB investigators found, have over the past five years opened more than 2 million accounts that customers, as one press account puts it, “did not authorize, did not know they had, did not need, and clearly did not understand.”

Some customers even ended up paying late fees on these bogus accounts.

And that’s apparently why CEO Stumpf has emailed me — and millions of other Wells Fargo customers. The recent headlines about his bank, says Stumpf in his missive, do “not reflect Wells Fargo at its best.”

But the bank, Stumpf goes on to pledge, is going to “get things right” and “fully reimburse any customers who were affected by these actions.”

Here’s what Stumpf doesn’t say in his email: His bank’s enormous annual earnings — and the enormous rewards these earnings have “earned” him personally — rest on a systematic “sandbagging” of the average Americans who walk into Wells Fargo branches.

Wells Fargo employees have been using “sandbagging” as a label for opening unauthorized customer accounts. But “sandbagging” also has a broader dictionary definition. If you treat somebody unfairly, if you manipulate to deceive, you’re sandbagging.

Wells Fargo’s top execs have been sandbagging, in this sense, ever since former CEO Richard Kovacevich invented “cross-selling” and turned Wells Fargo into the banking industry’s top profit pacesetter.

Cross-selling — having bank employees work aggressively to sell existing customers lots of new financial products, whether they need them or not — has essentially become the Wells Fargo claim to banking fame.

Banks typically don’t make all that much off opening a traditional traditional checking or savings or credit card account, only $41 on average, notes the New Yorker’s Adam Davidson. But some financial products that banks offer — like mortgages — can return a profit 25 times that modest average.

The more accounts a customer has with a bank, sales data show, the likelier a customer will be to sign up for one of these higher profit-margin offerings.

Nobody in banking cross-sells as well as Wells Fargo. Since the early 2000s, the average number of financial products per Wells Fargo customer has jumped over 50 percent.

This huge hike didn’t just haphazardly happen. Wells Fargo’s top execs made it happen — by establishing incentive systems and quotas that rewarded employees for getting customers to sign up for services they had no need to purchase.

Wells Fargo’s top executives, meanwhile, had their own personal incentives. Carrie Tolstedt, the Wells Fargo exec in charge of the bank’s retail side, had her bonuses tied to the bank’s cross-selling success. In 2015, crowed the Wells Fargo proxy statement last year, the “strong cross-sell ratios” that Tolstedt’s “leadership” delivered, helped her to a $7.3 million stock and cash bonus.

Those same strong cross-sell ratios have helped CEO Stumpf deliver up, year after year, the banking industry’s highest profit rates. The bank returned 12.7 percent on common equity last year, over twice the return the Wells Fargo rival Bank of America registered.

For that achievement, Stumpf has been duly rewarded. He took home $19.3 million in 2015, his fourth year in a row at that level. In 2011, he pocketed a mere $17.9 million.

We have, to be sure, no evidence that Stumpf ever ordered any Wells Fargo manager or employee to set up unauthorized accounts for Wells Fargo customers. Stumpf and his fellow execs like Carrie Tolstedt had a more subtle impact. They fostered a banking culture that actively encouraged managers and employees to sandbag customers.

Those Wells Fargo managers and employees who set up unauthorized accounts — all 5,300 of them —have now been fired, says CEO Stumpf. Carrie Tolstedt has announced her retirement. She’ll walk off, Fortune reports, with $124.6 million in stock, options, and restricted Wells Fargo shares.

Stump remains as CEO.

“Once again,” laments the New Yorker’s Adam Davidson, “a big bank was caught doing something awful” and “no senior manager” — let alone CEO — “was punished in any way.”

But punishment, notes the advocacy group Americans for Financial Reform, could and should be coming. Federal watchdog agency officials have the legal power to compel banks to “claw back” any executive earnings that fraudulent behaviors have generated.

Americans for Financial Reform is demanding that Wells Fargo claw back Carrie Tolstedt’s $124.6-million windfall — and also recover the bonuses Stumpf received during the bank’s sandbagging heyday.

Tyrel Oates would most likely agree with the AFR demands. Two years ago, Oates — then a Wells Fargo employee in Portland, Oregon — sent Stumpf an email that urged the CEO to recognize America’s “increasing focus on income inequality” and take steps to make Wells Fargo’s internal distribution of income more equal.

Oates then copied his email to some 200,000 of his fellow Wells Fargo employees. Stumpf never responded. Wells Fargo institutionally responded, Oates noted in a resignation letter last year, by “limiting who we can and cannot email within the organization.”

Interestingly enough, lawmakers in the city where Oates labored for Wells Fargo will shortly be considering a response of their own to the inequality that executive pay excess inflicts on the nation. Portland will be holding hearings next month on a proposal that would place a surtax on any publicly traded companies operating in the city that pay their top execs over 100 times their employee median pay.

In 2014, the year Tyrel Oates sent his email plea, Wells Fargo CEO Stumpf took home over 600 times what Oates was making.

Institute for Policy Studies associate fellow Sam Pizzigati co-edits Inequality.org. His most recent book: The Rich Don't Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900–1970. Follow him on Twitter @Too_Much_Online.