The Wells Fargo Scandal Was by Design

Some years ago I worked for a mid-sized financial multinational. Towards the end of my tenure, my employer merged with another company, and the senior executives in my department were replaced with Americans. (It was the smallest department in the division, and they felt they should give the Americans something.)

There had been some… dubious… practices before, stuff that skirted the line, mostly related to moving near future earnings into the current month, quarter, or year end. Because I was involved in both operations and compliance, I had made my concerns known, but what was being done was legal–if marginally so.

When the new senior managers took over, they started to require certain “numbers” of lower management. These numbers were hard to reach, but we tried. One day, the dictum came down to reach a number which simply could not be met. Fortunately, it wasn’t a number involving money.

Junior and middle management told the senior executives that the number was impossible; could not be done. The seniors insisted, the lower management resisted. The seniors said, “Do it, or else.”

They got their numbers. 100 percent on a specific metric. The reports all said so.

Problem was, getting 100 percent on that metric was legitimately impossible. The reports were now being changed. Straight up lies were being reported to the executives. And that was only the beginning; having forced lower management to lie about one thing, there was no reason for them not to lie about other things.

To be clear, they did it to save their jobs. “Get these results or lose your jobs” will get you the results you ask for–especially if you dangle bonuses on the other side: “If you do, we’ll reward you.”

So I have no trouble understanding how Wells Fargo got 1.5 million bank accounts and 565,000 credit cards that customers didn’t want. No trouble at all. “If you fail to meet the numbers we’ll get rid of you. If you meet them, we’ll reward you.”

Of course, for this to happen with actual financials, not just operations, the compliance staff and most of management had to be onside. Any decent audit or internal controls will pick that up, any competent junior operations management will figure it out. It can be done by small groups, not by 5,300 employees.

This is confirmed by how the senior executive in charge was treated.

Carrie Tolstedt, the divisional senior vice president for community banking, was the person responsible for Wells’s 6,000 branches where the infractions took place. When she retired, quietly, in July, the bank knew that her operation had been under scrutiny for sales tactics for more than a year. Ms. Tolstedt spent 27 years at Wells Fargo, and was no doubt steeped in the bank’s culture. In the last three years, she was paid a total of $27 million. She remains employed at the bank until the end of the year. When she leaves, she will probably be able to take with her nearly $125 million in stock and options.

The NYTimes and most commenters are obtuse about this. Completely obtuse.

By Wall Street standards, the Wells Fargo fiasco is minor in terms of dollar amounts. According to the Consumer Financial Protection Bureau, the employees opened something like 1.5 million unauthorized deposit accounts in the name of unsuspecting customers and made 565,000 unauthorized credit card applications, generating $2.6 million in fees and enabling the employees to qualify for bonuses. Wells agreed to pay $185 million to settle

This wasn’t about revenue. It was about being able to say, “We opened so many new accounts and credit cards” to Wall Street. Much of executive compensation is based on stock options and stock prices go up when you “beat expectations” and report good news. New accounts and credit cards aren’t expected to generate a lot of money immediately, but they are leading indicators of future earnings. By beating expectations on these numbers, Wells Fargo would have a higher stock price than if they didn’t, and everyone who was paid in stock options in the company (a.k.a. every executive, likely) would receive more money for those options.

Carrie Tolstedt is being treated well because she did what she was supposed to. The 185 million dollar settlement is worth more than the accounts were to Wells Fargo, BUT the executives running Wells Fargo got a lot of personal money out of it and were not punished. Some of them, those Tolstedt reported to, may well have “earned” promotions from it as well, based on meeting or exceeding sales goals.

Everyone who makes decisions at Wells Fargo, in other words, benefited from the scam. The only people punished were junior employees who, while complicit, I guarantee were doing what management wanted them to do, and who would have been fired before this if they hadn’t been willing to play along.

Financial fraud of this sort always follows this pattern: Executives get rich doing it, the company takes a hit–but not the executives–and the executives have no reason not to go on to their next fraud or even go back to what they were doing (sub-prime loans are a thing again, and we’ll find out many of them were based on fraud, again.)

The only way this sort of thing will stop is if we start charging senior management, the CEO, and their board members with crimes. Use RICO statutes to say it was organized crime (it was), and take their money. Assign them public defenders. Even if they don’t go to jail, they will lose a decade of their life defending the case, and it will serve as a genuine deterrent to other financial fraudsters. (If they do go to jail, it should be to nasty maximum security penitentiaries.)

Fines for the company are NOT a disincentive. In this case, the fine is more than the company made, while in other cases it has been much less, but it doesn’t matter: The executives got their money and they make the decisions. The company is a fictional person, not a real person; it does not make decisions.

This sort of thing will continue until we get serious about stopping it. People will probably only get serious when a financial and economic crisis occurs which is so severe that most everyone in power is swept out of power and not before. Criminal charges did not occur over the last financial crisis because no one in power, most especially Obama and his Justice department, did not want to insist upon them.

Bill Clinton had a hundred million not long after retiring as President. He pushed through massive financial deregulation. A few years after being President, Obama will be worth even more than Clinton. Financial executives may bitch about Frank-Dodd, but they know Obama saved them from long terms in prison and did not get in the way, and indeed abetted, trillions of dollars being funneled to save their companies and keep the game, and the frauds, going.

Those who “win” the capitalist game always immediately try to buy out the system, meaning buy the politicians and regulators, so that they can never truly lose their position of power and wealth.

And that, in the end, is what the Wells Fargo “scandal” (a good name, because scandals usually have no real consequences for anyone who matters) is about.

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