The “sandbagging” scandal that slammed Wells Fargo this week harkens back to the financial sector’s behavior a decade ago. Back then, the big banks’ affinity for sub-prime loans and collateralized mortgage obligations (CBOs) catapulted the U.S., and much of the world, into the largest fiscal crisis since the Great Depression. The Wells Fargo episode, which reveals a rotten culture across the one of the largest banks in the U.S., leaves a huge stain on a company that manages almost $2 trillion in assets and generated over $86 billion in revenues last year.
Wells Fargo was left relatively unscathed during the 2008-2009 financial crisis, and in fact benefited as it swooped up now-defunct Wachovia. While its “big 4” banking rivals — Citigroup, Bank of America and JPMorgan Chase — still have their reputational struggles, Wells Fargo projected images of a squeaky-clean image with solid corporate governance. It even boasted a large portfolio of environmental and water investments.
But 2 million fake accounts later, its reputation is in tatters and is a poster child of why so many Americans do not trust our institutions, starting with the big banks.
So, what happened with Wells Fargo?
A week ago, the U.S. Consumer Financial Protection Bureau (CFPB) fined Wells Fargo $185 million, saying employees illegally opened bank and credit card accounts to pad sales figures. The widespread shenanigans are now well documented.
Employees, bearing the pressure of sales quotas, often felt desperate and employed a variety of tactics, the CFPB said. Accounts were opened without consumers’ consent, funds were transferred between accounts without customers knowing, and accounts were stealthily moved online. The bank also reportedly harangued customers’ friends and family. (Full disclosure: I was hit up by someone on an online dating app a few years ago. The conversation died about five minutes later, when I was asked if I would open a Wells Fargo account at a Delano, California, branch. I responded with praise for my credit union.)
The $185 million fine is the largest penalty the CFPB has ever imposed. And thousands of hourly employees have lost their jobs as a result.
Los Angeles City Attorney Michael Feuer revealed other maneuvers that alternated between bold and crass, Matt Levine of Bloomberg reported last week. Consumers were told they could not get a service or product unless they signed up for an account, Feuer alleged. He also cited equally troubling incidents: In some cases, employees falsely claimed there would be no monthly fees for some new accounts, only to impose fees later. And, occasionally, new accounts would be held over until the next reporting period if a current sales quota wasn’t reached. Most of these new phony accounts were opened on the down-low: Only about 14,000 of the 565,000 new credit card accounts incurred fees, as generally employees only wanted to meet internal sales goals and did not want to be caught.
As a result, over 5,300 Wells Fargo employees — many of whom were coping the best they could in what has been often described as a hostile and toxic work environment where quotas were prioritized over ethics — were thrown under the bus. But as been the case with the worst of the banking scandals here in the U.S., the Wells Fargo executive who was in charge of this operation was not only left unpunished, but generously rewarded. The bank’s former head of its consumer banking operations, Carrie Tolstedt, will walk away with a $124.6 million severance payment as part of her separation agreement. Furthermore, Wells Fargo confirmed that Tolstedt will not have to disgorge any of her previous salary despite the CFPB making it clear that she should be held responsible for her business unit’s actions.
Wells Fargo says it is changing its business practices, starting with the elimination of sales goals for retail bankers and preventing its employees from cross-selling other banking products. But the company’s CEO, John Stumpf, refused to take any responsibility, even though he is scheduled to testify at congressional hearings next week in Washington, D.C.
“There was no incentive to do bad things,” Stumpt told the Wall Street Journal on Tuesday. He has has not yet explained how a work culture could be so oppressive that over 5,000 employees used such drastic means to meet quotas, or how they could escape undetected for so long.
For citizens still resentful over the global financial dumpster fire the banks started a decade ago, Wells Fargo is another case study of how those heading financial institutions not only escape any penalties for their behavior, but also profit. Just as no one responsible for the 2008 financial meltdown logged any jail time, it appears no individuals at Wells Fargo will pay any price – except those employees who only did what they did to enhance their meager salaries and help Wells Fargo appear stellar to its shareholders. Those shareholders (including the author), are not too happy now, as Wells Fargo’s stock price dipped 6 percent in value last week, although as of press time share prices have slowly begun to rebound.
The only winner coming out of this sordid tale appears to be credit unions. Bloomberg practically begged credit unions and community banks to capitalize on Wells Fargo’s behavior, though many consumers — especially millennials — don’t need a story about 2 million fake accounts to change where they bank. Customers are flocking to credit unions, eschewing ATMs on every corner and high fees in exchange for better interest rates and less nickel-and-diming. Credit union bosses may want to include Mr. Stumpf on their Christmas card list this summer, as his flaccid response to Wells Fargo’s crisis gives these smaller banks gifts that will long keep on giving.
Image credit: Mike Mozart/Flickr