Wells Fargo CEO John Stumpf may come to regret believing his own PR. The bank chief backed himself into a corner by insisting that the creation of over 2 million of bogus customer accounts over a four year period was the doing of a whole posse of rogue employees, no one had any incentives to do bad stuff, Wells has a perfectly upstanding corporate culture and senior management had no idea what these bad apples were up to. And Stumpf was so confident that this scandal would blow over that he managed to let the executive who supervised the operation in question retire while the settlement talks with regulators and the Los Angeles City Attorney were at an advanced stage, with her nearly $125 million payday intact.
But now the Department of Justice, and critically, the elite Southern District of New York (along with the Northern District of California) are in the early stages of an investigation. As the Wall Street Journal, which broke the story, reported:
While in early stages, the investigation by federal prosecutors is focusing on whether someone senior within the bank directed employees to falsify documents in conjunction with the opening of accounts and products without consumers’ knowledge or authorization.
Prosecutors are also focusing on whether there was willful blindness to sales practices on the part of executives at the bank, these people said.
The fees generated by this brazen fraud were chicken feed, a mere $2.4 million, which means that was not the point of this exercise. The object was to meet targets so that the bank show continued growth in the number of accounts and in the average number of products sold per account, both of which were metrics the bank touted with analysts. In other words, the targets were the mechanism to drive staff to show numbers to analysts to keep Wells’ growth story alive and well. And they delivered! Too bad the numbers were sometimes lacking in substance.
In other words, senior management benefitted directly from this chicanery, far more than branch staff did (although keeping from being fired for not meeting your goals is plenty motivating).
The story that Stumpf is peddling to the media, and presumably to the DoJ and the Senate Banking Committee, is that employees were gaming the system. Adam Davidson, the Lord Haw-Haw of the 1%, dutifully chimes in to claim that it’s impossible “for a large bank to monitor every one of its quarter million employees,” when in fact it was doing just that with the staff in question as far as their sales metrics were concerned.
The reason this scandal has gotten traction is that it is obvious that a supposedly well run bank could not miss the creation of millions of phony accounts, particularly when many had clearly bogus Wells Fargo e-mail addresses like firstname.lastname@example.org, email@example.com, or firstname.lastname@example.org. Reader Clive describes how banks, even back to the stone ages of paper-based systems, had checks to catch instances of employees selling customers bank services they hadn’t intended to buy. Hoisted from comments (emphasis original):
Opening up fake products to claim a sale is a trick which goes back to when a TBTF tried to sell Noah Ark insurance. When I started in retail at a TBTF nearly 30 years ago, senior management (as a minimum the VP or equivalent in charge of a geographical area) would get reporting from the internal compliance or risk function about the number of accounts opened which had low turnover. A low turnover account is a serious red flag for either mis-selling or even (as was the case that has been exposed at Wells’) the salesforce boosting their figures by robo-applications. It was easy enough (and sufficiently widespread there were operating procedure to check on it) in the days of paper applications. You’d just, during the course of a sales interview, present the customer with another thing to sign, usually at the end when they wanted to leave, in a flurry of other paperwork that needed them to put pen to paper.
With digital fulfilment of many retail products in branch (sorry, I should say “store” if we’re talking about Wells Fargo shouldn’t I) it is even easier. You walk the customer through a myriad of screens, let’s say for a loan application. The CRM [customer relationship management] system will already have been spamming the bank employee and the customer to sell them anything and everything else they’re eligible for. If, for example, they are pre-approved by their FICO score for a credit card product with a line of credit built in already, it’s often enough to just tick a box on screen to complete that product sale as part of the sales process for the loan. At the end, the printer will spew out a load of paper for the Terms and Conditions, the product details and (if required) a space for a signature. If a (as in my illustration) credit card product has been added, and the bank employee doesn’t tell the customer then it is highly likely the customer won’t be aware. If they notice later, maybe when they’re back home filing the documentation, they may think to themselves “oh, that’s a mistake, I didn’t ask for that” and make a mental note to contact the bank to tell them and maybe cancel the product. They’ll more than likely forget or have better things to do with their time.
Even if they do make that call, they’ll get put through to the “customer retention” team who will try their level best to talk them out of cancelling the product.
Of course, it all comes out in the wash eventually — the customer didn’t want the product in the first place and if they didn’t want it, they almost certainly won’t use it. This will result in a low (or no) activity account.
Simplistic attempts are generally made in the bank’s operations to prevent this kind of sales practice. The most common is that if within in a certain timeframe (a month or 6 weeks is usual) there hasn’t been a transaction on the account or the card hasn’t been activated, the account will be closed and this low activity account sale will be clawed back from the salesforce. But of course, this is widely known in the bank employees, so the standard ruse is to diarise a follow-up customer service call, tell the customer some cock-and-bull story about how the bank employee has noticed a potential security issue with one of their cards and could they phone the security team just to confirm the card is still in their possession. Or another variation is to tell the customer If they want to call into the branch, they can sort the “problem” out, while in the branch they get the customer to phone the activation line, then “check” everything is okay by doing a cash advance at the counter on the card (they’ll even refund the fee, how kind!).
These are just some tricks, readers can get the gist of how it works and probably even think of their own alternatives.
But there’s still a trail of evidence which the bank should be following — accounts which are very light in transactions after 6 months or dormant in a year. These are always investigated, not for the customer’s benefit but because it costs the bank money to maintain the account. They are invariably force-closed due to low activity (this will be in the product’s standard Terms and Conditions, to give the bank the ability to do this). This management information is collated and picked over endlessly by the P&L accountants. Too many customers attracted to the brand, sold product to, but who then walk away are value-destructive. Senior management (one part of the senior management team, anyway) are all over this metric like a rash.
Of course, another “arm” of senior management — those who’s bonus is simply determined by sales volume, not long-term profitability — don’t care and unless the one at the top (and I do mean the top, the CEO is the only one who can wield the big stick in this sort of management turf war) has his or her finger on the pulse and determines to stop the rot, the rot will go on and get rottener and rottner until the stench (the stinkyness being the Average Revenue Per Customer declines) becomes too obvious to ignore.
Notice the key issues here:
1. Because maintaining accounts costs money, banks close accounts with low activity. In other words, if industry-standard procedures were in place, the bogus accounts at Wells should have been flushed out pretty quickly. That in turn would result over time in the staff members and branch managers who opened up too many dodgy accounts getting dinged. While that may have happened at Wells (as in it is conceivably true that they fired 5,300 employees for opening fake accounts), this was at a scale that it was an ongoing issue that it was never cleaned up because it benefitted management. In other words, the individual and branch targets were so high that they required cheating to meet them, as reports from ex employees indicate. But rather than lower the targets to something achievable, Wells instead churned employees who did what they felt they had to to keep their jobs, and kept the bezzle of the fake accounts going in their reports and analyst calls.
2. Retail banking at large institutions is run through metrics, all the way down to the employee level. It is inconceivable that senior management didn’t see the increase in low/no activity to total accounts while this con was underway. That means they were actively complicit.
The Department of Justice should not find it all that hard to establish senior management culpability if they are serious about this case. The SEC and DoJ have been reluctant to use Sarbanes-Oxley-based theories of action, but this would seem to be an ideal situation, since both the CEO and CFO repeatedly certified the accuracy of financial reports and the adequacy of controls. Sarbanes-Oxley was drafted so as to facilitate cases that were launched as civil actions to easy be flipped to criminal cases if discovery unearths serious enough dirt. I hope the lawyers in the commentariat will discuss what other angles the DoJ might pursue, in addition to securities fraud.
However, given the proximity to the elections, Wells management would normally regard time as its friend and will do everything in its power to drag the investigation out, on the assumption that changes in personnel in the Administration and the DoJ will work in their favor. But investors and the board may not tolerate having the sword of Damocles of a possible criminal case hanging over the bank for long. Stay tuned.