It’s a safe bet that Wells Fargo CEO John Stumpf will be turfed out in the next ten days. Not only did he break the cardinal rule of executive survival, namely, throw someone under the bus when the going gets rough, but he couldn’t even manage a credible show of contrition and groveling after a massive fraud took place on his watch.
As one Senator noted, the Wells Fargo fake accounts scam achieved a difficult feat: “For the first time in ten years, you have united this committee, and not in a good way.” Even Republicans like Paul Toomey used the “f” word, as in “fraud”.
The chamber was packed, and the toughest interrogation came from Sherrod Brown, Bob Menendez, and of course, Elizabeth Warren, who reached new levels of bad-assery. For instance, the Massachusetts senator pointed out that Stumpf had gotten $200 million in gains on his Wells Fargo shareholdings while this fraud was underway and demanded that he pay it all back. Too bad she didn’t add that he could easily have paid the restitution to consumers of a mere $2.4 million himself.
Some of the revelations:
Wells Fargo had obvious, glaring control deficiencies that appear designed to give Stumpf and his fellow execs a “whocoulddanode?” excuse. The main audit functions sat in the business units, not the at the corporate level. It is a basic failure to have control functions report into profit centers. This is the structure that led to JP Morgan’s London Whale debacle and elicited incredulous reactions all over Wall Street. Tom Curry of the Office of the Comptroller confirmed that this was a serious deficiency. But that begs the question: how did regulators give this foxes run the henhouse organization a free pass?
Despite saying he’d take full responsibility, Stumpf did nothing of the kind. Even though the press had already found a branch manager (who was later fired) warning him of abuses in February 2011, he says he didn’t have any idea there was a problem until sometime in 2013. Stumpf kept insisting there was nothing wrong with the bank’s culture, which elicited derision: did 5,300 employees really join Wells Fargo just for the fun of forging signatures and making up fake e-mail addresses? The CEO kept insisting the 5300 fired employees were bad apples, leading to the retort by Menendez:
This isn’t the work of 5,300 bad apples, this is the work or result of sowing seeds that rotted the whole orchard,You and senior executives created an environment where a culture of decrepit thrived.
Several Senators argued in some detail how it was absurd to expect low wage workers with families to buck the pressure of Wells Fargo’s absurd sales targets with the threat of firing over their heads. In yet another proof of how out of touch he was, Stumpf tried arguing that these were good-paying jobs, which the Senators again disputed, pointing out that the overwhelming majority of people who were canned were at the bottom of the food chain and $35,000 to $60,000 per year wasn’t something to brag about.
And the regulators agreed. The Los Angeles City Attorney said Wells had an “excruciatingly high pressure” sales culture, and Richard Cordray of the Consumer Financial Protection Bureau concurred, separately using the word “excruciating.”
Another intelligence-insulting theme was Stumpf’s hollow declaration that “I am fully committed to fixing this issue.” Several Senators raised the issue of the cost of credit score damage, which can come about by the mere act of having a bank request a credit report for the purpose of getting a credit card. They asked if Stumpf intended to make customers whole who’d wound up paying higher costs on mortgages and other loans. Stumpf said he’s take it under advisement, and was similarly non-committal about addressing the harm done to employees who’d bucked the unreasonable sales targets and were fired as a result.
Stumpf refused to consider clawbacks. Stumpf will go down over this issue. He’s clearly more attached to keeping his gains than keeping his job. But what was revealing was his refusal to entertain them even for the conveniently recently retired Carrie Tolstedt, who is leaving with an exit package of an estimated $125 million in cash and equity prizes. Note that the financial press has reported that $17 million could be clawed back under the bank’s rules. When pressed, even though Stumpf kept maintaining the party line that Tolstedt had resigned, he said that the bank “wanted to go in a different direction” which is code for “she was forced out”.
Senate Banking Committee chairman Richard Shelby rejected Stumpf’s refusal to consider clawbacks: “Explain to the public: What does accountability look like when an executive departs with millions of dollars?”
Warren blasted Stumpf for not firing Tolstedt, pointing out that she would have been paid $45 million less:
You really have to watch this exchange. Warren flays Stumpf for the fact that Tolstedt is eligible for a 2016 bonus by virtue of not having been fired, and to add insult to injury, he refuses to make a recommendation to the compensation committee of any sort. And he denies that a massive fraud occurred.
Some of the actions look to set up a criminal case. I’m getting out in front of serious legal analysis, but some of the actions were so rancid that they would seem to set up criminal charges. The San Francisco bank would transfer money from deposit accounts to cover fees in unauthorized credit card accounts. In addition, bank employees would forge customer signatures to create phony accounts.
In many ways, this is worse than the robosigning scandal, since the signatures were thousands of fakes of a single mortgage servicer or law firm employee, who presumably was in on the con or would not have objected. It was still a fraud on the court, since the affidavits in question affirmed personal knowledge, where there was often none even if person whose signature was robosigned had made all those signatures him or herself. But forging customer signatures on a widespread basis is another kettle of fish entirely.
Other bad actions fall into the “serious chutzpah” category. For instance, one of the products the bank sold was fraud protection…and it appears the bank committed fraud on the very accounts on which is sold protection. The bank has also insisted that customers go into arbitration, arguing that the mandatory arbitration clauses on real accounts apply to the bogus ones too.
Stumpf conned the Senators and regulators about his credit score remedy, which is not about helping customers, but more damage control by the bank. Stumpf was pressed repeatedly on how he’d repair customer credit scores. And the correct answer isn’t hard: tell the credit agencies for each and every one of the over 500,000 credit cards that the credit reports should never have been pulled on them and that any late charges were the bank’s fault.
But that isn’t what Wells Fargo is planning to do. Stumpf instead said the bank will go through the far more labor-intensive effort of calling each and every customer! Now why would the bank do that?
To sell them again! That is, to try one more time to arm-twist the customers into saying that they will keep the cards, even if Wells faked their application. Several times, Stumpf took the position that the bank didn’t know how many accounts were part of the scam, but they came up with the 2 million total (roughly 1.5 million bank accounts and another 560,000+ credit card accounts) to make sure that they got every one that might be fraudulent. In other words, the bank is taking the position that many of those accounts might be legitimate, and is trying to take another pass at making that look true.
If I were a financial regulator or Elizabeth Warren, I’d demand the scripts that the call center employees will be using to, um, placate customers.
You could see the set-up at work at several points of the hearing. For instance, a Senator pressed Stumpf on whether the bank as a matter of course put customers into products they hadn’t asked for. Stumpf refused to give a straight answer. The Los Angeles City Attorney picked up on that issue in the later panel, pointing out that early in his investigation, Wells Fargo’s position was that these customers needed these products whether they asked for them or not.
Even though it is frustrating for those of us who have been chronicling bank misconduct over the years to see this case be the one that galvanizes regulators, Congress, and legislators, since even though it involved huge numbers of customers, the damage for they suffered was not all that bad when you consider other bank scams that hurt millions of citizens far more deeply, such as fraudulent mortgage lending and foreclosures, debt collection abuses, and payday loans, there is still significant benefit to this rot being unearthed.
First, the odds seem decent that there will be a criminal prosecution, at least of Carrie Tolstedt. By all accounts she was a micromanager. And with so many employees, including some high level ones like regional presidents having been fired, there will be plenty of people to provide evidence. Look at how easy it was for the Wall Street Journal to get over three dozen bank employees at various levels, including senior ones, as sources for a story last week. And given that Tolstedt would have been the logical party for Stumpf to throw under the bus, there are only a couple of reasons I can come up with as to why he didn’t. First (and this is very likely) her separation agreement contains a very stringent non-disparagement clause. But second, it is also certain that if Tolstedt is the target of a criminal investigation, and her attorneys think she is at real risk of losing, the logical path for her is to cut a deal in return for testimony against Stumpf and her boss, the president. So Stumpf is defending her to defend himself. By contrast, Jamie Dimon was in a similar position with the head of JP Morgan’s Chief Investment Office, Ina Drew. But she was still on the payroll. So he could appease bank critics by tossing her over the side.
While one prosecution of a highly-paid bank exec may not seem like much, it’s easy to forget that one thing middle and upper class people really are afraid of is going to jail. You can see in the exchange with Warren that Stumpf finds the premise of her outrage to be incomprehensible. People of his stature, like Tolstedt, are entitled to special protection like solicitous treatment behind closed door, and minimization of embarrassment even when they are cast out. By contrast, lower level employees are tissue paper, to be tossed aside without further thought when they are no longer useful. Stumpf can’t even begin to see his deeply internalized assumptions about class and rank.
In the Great Depression, only one senior banker went to jail, Richard Whitney, who had been head of the New York Stock Exchange. Whitney’s was a clear-cut case of embezzlement, of borrowing against customer assets to fund his lavish lifestyle. In contrast to today, when Whitney’s fraud was unearthed, he was referred to prosecution almost immediately. He admitted his guilt and went to some length to exculpate his accountant, who he had pressured into cooperating.
Even though the ethical norms were vastly higher then than now, the spectacle of Whitney’s fall was riveting, and was a chilling warning to other members of his class that no one was above account. It will be much harder to make a dent on diseased banking industry ethics, but retail banking is widely seen as have so much less wriggle room for bad actions compared to wild and wooly Wall Street that the spectacle of retail bankers in the dock would send a message that the days of financiers being a protected class are numbered.
Second, the Wells Fargo fraud will make it hard for the Republicans to roll back bank reform. The Wells Fargo debacle is sure to remain in the press for weeks, if not longer. This scam, and the display of executive intransigence in its prettied up Stumpfian embodiment strengthens the hand of Elizabeth Warren, Sherrod Brown, and other bank reformers. Even with a Trump presidency, it vitiates the case for rolling back Dodd Frank, since the big objective of that effort was to kill the Consumer Financial Protection Bureau. Even though Warren was a bit too gleeful about the role of the CFPB, the Los Angeles City Attorney, which did the serious spadework that got this case going, said his investigation was critically dependent on the CFPB’s consumer complaint database.
So as Lambert likes to say, pass the popcorn. Wells Fargo will provide more revealing theater as well as a vivid proof that banks need stringent oversight. The real message of Wells, from the cheap pass it got on its mortgage servicing abuses to its comeuppance on its account fakery, is that banks, especially commodity areas of banking like retail banking, can’t generate outsized profits or growth honestly. For the benefit of all of us, they need to become boring again, either by breaking them up or regulating them like utilities.