The CEO

On paper, John Stumpf was one of the last folks you’d expect to end up running the biggest bank in America. He grew up as one of eleven children on a poultry and dairy farm in Minnesota, sharing a single bedroom with his brothers and waking up at 4:30am to pick eggs in the family henhouse. After graduating in the bottom half of his high school class, he worked as a breadmaker in a small-town bakery before gaining admission to a state university.

Stumpf started out in the world of retail banking at the very bottom of the ladder, working as a repo agent for a local institution, but he moved up fast. Six years later, he joined Northwestern National Bank, leading it on a string of acquisitions that culminated in a 1998 merger with Wells Fargo.

Throughout his early years in banking, Stumpf honed a plain-spoken mantra for growth that would come to define his career in ways both good and bad: “There are only three ways a company can grow — earn more business from current customers, attract more business from competitors, or buy other companies.”

This strategy seemed to work. In 2008, Wells Fargo’s acquisition of Wachovia would double its footprint, creating one of the largest banks in the world. By then, Stumpf was CEO, and counted luminaries like Warren Buffett among his friends and bridge partners; through his investment vehicle Berkshire Hathaway, Buffett would later become Wells Fargo’s largest shareholder.

Stumpf’s rise from farm boy to top executive is the stuff of the quintessential American Dream — and perhaps that’s one reason why his fall from grace has taken on such a Shakespearean quality. On October 12, 2016, John Stumpf resigned as CEO of Wells Fargo. The end of his career roughly coincided with the end of Wells Fargo’s reign as the most valuable bank in America by market capitalization, a three-year run which had screeched to an abrupt halt less than a month before.

In different ways, both of these outcomes were catalyzed by one woman who shared his middle-class roots but took a very different path: Elizabeth Warren, a Harvard Law School professor and the senior U.S. Senator for Massachusetts.

The Senator

Some people may not know that Elizabeth Warren is one of the top five cited law professors of all time in her field of specialization — bankruptcy. Beyond her recent appeal as a popular senatorial standard-bearer for progressive social policies, it’s safe to say she knows a thing or two about how badly things can go wrong if consumers aren’t protected.

In 2007, then-professor Warren proposed the Consumer Financial Protection Bureau in a paper entitled “If It’s Good Enough for Microwaves, It’s Good Enough for Mortgages.” The agency was conceived as an analogue to other regulatory bodies like the Federal Trade Commission, but with a focus on protecting Americans in their everyday dealings with the financial institutions that issue their credit cards and underwrite their mortgages and student loans.

As the scale of the damage wrought by subprime mortgages made itself known, culminating in the financial crisis and the Great Recession, Warren’s proposal took on a new resonance. In 2010, the CFPB was officially brought into being by the Dodd-Frank Act, with the mission of protecting consumers from “unfair, deceptive or abusive practices” and “taking action against companies that break the law.”

Warren was supposed to lead the new regulatory body, but Republicans blocked the nomination, fearing that she would be too litigious; President Obama nominated the former Attorney General of Ohio, Richard Cordray, instead.

Instead, Warren ran for the Senate in 2012 on a wave of support from Democratic lawmakers, defeating the Republican incumbent Scott Brown to regain Ted Kennedy’s old Senate seat.

Now, Senator Warren was in a position to put her consumer advocacy chops into practice. Her years in the legal world and in politics would culminate four years after her election, when she found herself face-to-face with John Stumpf at a Capitol Hill hearing on September 20th, ready to take him to task for the largest bank fraud in the post-financial crisis era.

The Scam

What the heck was going on at Wells Fargo?

It turned out that the bank’s rosy growth had disguised a silent plague: over the past several years, more than five thousand Wells Fargo employees perpetrated what can only be described as a gigantic scam against their own retail banking customers, signing them up for fee-generating accounts without their permission or knowledge.

These employees went so far as to create phony emails and PINs to register new accounts for their customers, transferring money to the new accounts without permission. Already derided for their lack of transparency, “normal” bank fees were bad enough — and now Wells Fargo customers were paying even more for services they never wanted in the first place.

Did thousands of line employees independently decide to swindle their customers? Far from it: Wells Fargo relentlessly incentivized its staff to push additional financial products, or “solutions,” on existing customers.

The bank imposed strict daily sales quotas on employees, and established a sales target mandating that each Wells Fargo customer should have eight separate accounts with the bank. The rationale for this goal? As expressed in Wells Fargo’s 2010 Annual Report, it was because “eight rhymes with great.”

And for a time, things were great. This practice was enthusiastically and euphemistically described by Stumpf as “cross-selling” on the quarterly earnings calls that saw Wells Fargo stock soar over the past five years. The first pillar of Stumpf’s growth philosophy was largely responsible for Wells Fargo pulling ahead of its peers: the bank’s industry-topping cross-sell rate was lauded in the analyst reports that catapulted the bank’s market cap — and Stumpf’s stock-based compensation — to new heights.

The Downfall

That is, until the Consumer Financial Protection Bureau (CFPB) announced a record-shattering $185 million settlement with Wells Fargo on September 8th, 2016, including a $100 million fine and full restitution for consumers who paid fees for financial products and accounts they never wanted.

This settlement was the culmination of an investigation that began in 2013 with an expose by the Los Angeles Times. In their complaint, the CFPB estimated that more than 1.5 million fake deposit accounts had been created for Wells Fargo customers, incurring more than $2 million in unauthorized fees, along with more than half a million fake credit card applications. In addition to the excess fees, victims of the scheme suffered damage to their credit scores.

In a day, Wells Fargo’s reputation as a tightly-run ship, a profitable investment and one of the “cleanest banks around” took a dramatic hit. As the bank’s stock began to dip, Warren Buffet, the largest shareholder, lost more than a billion dollars.

Without the watchful gaze and punitive action of the Consumer Financial Protection Bureau, it’s unclear how long it would have taken for a regulatory body to step in and investigate the allegations levied against Wells Fargo. Senator Warren’s new institution clearly demonstrated its willingness to make big moves in protecting consumers against “unfair or deceptive practices.”

But the fine wasn’t the end of the story for Wells Fargo or its leadership. On September 20th, Stumpf was summoned to testify in front of the Senate Banking Committee, facing down a bipartisan group of senators united in their ire against the culture and incentive structures that engendered fraud at such a massive scale.

And then Senator Warren took her turn at the microphone. What followed was a takedown of legendary proportions. Brushing aside the excuse that fake accounts were perpetrated by a few (thousand) bad eggs within the company, Warren asked why no senior leaders at Wells Fargo, including Stumpf, had been punished or returned their personal earnings in light of the scam. He didn’t have an answer.

After taking Stumpf to task for “gutless leadership,” Senator Warren closed with this statement: “The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top.”

Stumpf didn’t resign right then, but the damage was done: Warren’s barrage went viral on social media. After a second Congressional hearing that went no better than the first — in which lawmakers called Wells Fargo a “criminal enterprise” and compared it to Enron — the calls for Stumpf’s resignation grew louder, until he finally heeded them on October 12th.

Why This Matters

Financial institutions have scammed their customers in the past. The most notable and recent example is the 2007–2008 financial crisis, which stemmed from a large-scale victimization of uneducated consumers who were saddled with home loans that they couldn’t afford. Despite the scale of the carnage, very few executives resigned, none went to jail, and most CEOs of banks that survived are still leading those institutions today.

Responsibility is easy to share in good times, but becomes a slippery concept when things are going south. You could make the argument, as John Stumpf attempted to, that Wells Fargo’s leadership wasn’t directly responsible for creating fraudulent bank accounts, and that the blame lay primarily with “overzealous” employees who did the clicking.

But the culture Stumpf created, as CEO, had a far larger impact on the well-being of his customers than if he had been banging the keyboard to create fake accounts himself.

It may be fair to assume that Stumpf truly meant well with his imperative to cross-sell, but ignorance of the negative externalities of a strategy is no excuse. Stumpf’s inability to take immediate responsibility, to show with deeds instead of words that the buck stopped with him, ultimately doomed him. With her uncompromising repudiation of Stumpf’s negligence — and by championing the CFPB, long before her senatorial career began — Elizabeth Warren has ensured that CEOs of financial institutions everywhere will look a little closer at the risks their business plans pose to consumers, even when their stock is soaring.

Thanks to Senator Warren and the rise and fall of John Stumpf, leaders of financial institutions are painfully aware that there are consequences at the top for deceptive practices, which means that Americans can rest a little easier.

This article was originally published on the Trim blog. You can check out a spirited discussion on Hacker News here.