For many people, their trust in the country’s financial system was broken (perhaps irreparably so) by the financial crisis.
In the aftermath, the financial services industry needed to take steps to repair that broken trust. Steps were indeed taken by the financial industry, while other steps were taken upon it by federal and state regulators, all to ensure that a similar fate didn’t befall our economy again in the future.
First there was the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the agency it spawned, the Consumer Financial Protection Bureau, tasked with the mission of, as its name says, protecting consumers from being taken advantage of by the financial services industry.
Then came a raft of regulations and oversight on everything from consumer banking, mortgage lending, mortgage servicing, credit cards, credit reporting, debt collection, student loans, and a number of other financial products.
Those regulations and increased oversight were supposed to give consumers confidence that they could trust the financial services industry again.
There can’t be another financial crisis, not with these too-big-to-fail regulations…or so we were told. It can’t happen again. It won’t happen again…right? Right? Right!?!?!?!?
Heck, earlier this year, I called out a Fox News columnist for predicting that the country was on the verge of another housing crisis because Fannie Mae and Freddie Mac were going to begin buying 3% down mortgages.
Even I said it can’t happen again, at least not in the same way. There are too many rules, too much oversight, too much interest, and the memories of the financial crisis are still burned in the minds of everyone in this country.
And while I still believe that we’re not actually sliding back into the “same old, same old” with mortgage lending, the $185 million fine levied against megabank Wells Fargo for thousand of its employees opening more than two million fake accounts in customers’ names in order to get sales bonuses shows that Wall Street hasn’t learned its lesson.
Far from it, in fact.
The specifics of the massive fine against Wells Fargo are that a number of Wells Fargo employees secretly opened deposit and credit accounts under existing customers' names without the customer’s knowledge, which often racked up fees or other charges.
And all to boost the bank’s “cross selling” statistics. And to boost the bank’s bottom line.
Cross selling is quite prevalent among the big banks especially, as employees are encouraged to push new accounts onto existing customers, as evidenced by two independent reactions to the Wells Fargo fine from Richard Bove, vice president of equity research at Rafferty Capital Markets, and Josh Brown, the chief executive officer of Ritholtz Wealth Management.
Here’s Brown on the cross selling culture:
When I first read the story, I almost couldn’t believe it. Almost. But then I remembered everything I’ve been told by people working at the major banks. How they’re regularly whipped to cross-sell loans to their wealth management customers, credit cards to their banking clients, insurance products to their brokerage accounts, etc. It’s bad.
These are the metrics that Wall Street wants to see and they’re the yardstick by which executives are judged. So the decree goes out across the land and the rank-and-file employee incentives are set accordingly. And then, as these things always go, someone takes it too far. In this case, a lot of someones.
Bove shared a similar story in a note to clients Friday, in which he also stated that Rafferty Capital Markets is lowering its rating on Wells Fargo from “Hold” to “Sell” in the wake of the fine.
Here’s Bove on Wells Fargo:
It has been related to me that the bank took a number of steps behind the scenes to enhance the sales culture. On the positive side, it made a sizable commitment to technology creating a platform that would allow the bank to handle client needs at lower costs.
At the same time an intense sales culture was put in place. Regional supervisors would call branches, apparently, at times, more than once a week to determine how many new accounts were being opened. Branch managers made demands on the sales associates to get more business from existing customers and open new accounts.
It was related to me that the pressure was so intense and so pervasive that when a new customer came into the bank the account executive would open three accounts for that customer not just one and that the customer never knew what was happening. This would meet the need to both cross-sell products and to meet quotas, if they existed, for new accounts.
Bove goes on to say that he chose not to write about the rumors he heard about Wells Fargo’s culture because he didn’t believe that it could actually be happening, especially after the crisis.
But that’s exactly what was happening.
This is how the CFPB, which slapped Wells Fargo with the largest fine ($100 million) in the short history of the agency, describes what Wells Fargo’s employees were doing:
Spurred by sales targets and compensation incentives, employees boosted sales figures by covertly opening accounts and funding them by transferring funds from consumers’ authorized accounts without their knowledge or consent, often racking up fees or other charges. According to the bank’s own analysis, employees opened more than two million deposit and credit card accounts that may not have been authorized by consumers.
“Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses,” CFPB Director Richard Cordray said.
“Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed,” Cordray added. “Today’s action should serve notice to the entire industry that financial incentive programs, if not monitored carefully, carry serious risks that can have serious legal consequences.”
Cordray’s words, as they often do, carry a vaguely worded warning to the financial industry: If another company tries to pull a stunt like this, we fill find you. And we will fine you.
Now, say what you will about the CFPB (and many have), situations like this prove why the agency’s existence is critically important for consumers.
Over the five years the CFPB has existed, many in the financial industry have bemoaned the CFPB and its actions. The Republican Party basically stated in its national platform that it wants to abolish the CFPB. A Republican-crafted plan to abolish Dodd-Frank is due to be considered in Congress next week.
The CFPB isn’t without its faults.
But an agency designed to protect consumers is absolutely necessary. Why?
Because things like this Wells Fargo situation keep happening.
And as long as they do, the public will never fully trust the financial industry again.
The effects of the Wells Fargo fine go far beyond the $185 million the bank has to pay to the CFPB, the Office of the Comptroller of the Currency, and the City and County of Los Angeles, the 5,300 Wells Fargo employees that apparently lost their jobs because of their actions leading to this fine, or the millions of customers whose names were used open up fake accounts.
Wells Fargo, in its brazenness, has undone much of the goodwill that the country’s banking sector has worked so hard to build back up since the crisis ended.
Here are Bove’s thoughts on the far-reaching impact of Wells Fargo’s actions:
While there has been tremendous pressure put on the banking industry in the past 8 years by the politicians and the press, the public has voted with its money to increase its commitment to the banks. The public did this because it trusted these institutions. Wells just raised issues as to whether this trust was valid. It certified the claims by the politicians and the press that banks are run by questionable people who need to be thoroughly controlled by government or the public will not be protected.
Wells may have hurt every bank in the United States by what it has done. It may have put more fire in the bellies of those who want to more strictly regulate the industry. One can only wait and see but breaking faith with customers is simply unacceptable for any company in any business and this is the biggest issue facing Wells Fargo today.
More than that, this whole fiasco shows that the financial industry still hasn’t learned its damn lesson.
Wells Fargo, of course, is talking a good game in the aftermath, with the bank’s CEO, John Stumpf stating:
Wells Fargo’s culture is committed to the best interests of our customers, providing them with only the products they want and value. We also are committed to having a supportive, caring, and ethical environment for team members. We regret and take full responsibility for the incidents in which customers received a product they did not request, as that is inconsistent with the values and culture we strive to live up to every day.
Wells Fargo also is “taking the issue seriously” and “making fundamental changes,” and that all sounds good, but it doesn’t change the fact that thousands of the company’s now-former employees opened up more than 1.5 million fake deposit accounts and more than 500,000 fake credit card accounts.
And as Brown notes, this apparently started in 2011, just as the crisis was ending.
Here’s Brown again:
Are you f***ing serious? Was the Great Financial Crisis so long ago that all chasteness and propriety are already out the window? This scam has been apparently going on for five years, according to the articles covering the story. Which means it began within a few months of the end of the crisis and all of the congressional hearings and investigations that occurred in its wake. These people are fearless.
That’s bold, bordering on shameless.
Did Wells Fargo not learn anything from the financial crisis, much of which started with lenders pushing mortgage loans onto people who couldn’t afford them and couldn’t possibly pay back?
Fundamentally, how is this fake account situation any different? The bank is pushing financial products on people who don’t want them, can’t afford them, and aren’t fully aware of what they’re getting into.
Dan Berger, the CEO and president of the National Association of Federal Credit Unions, agrees.
“Wells Fargo’s illegal sales practices are an egregious violation of consumer trust,” Berger said.
“To open more than 1.5 million likely unauthorized consumer deposit accounts and more than 500,000 credit card accounts is despicable, and it’s flat-out fraud. Someone needs to go to prison,” Berger added.
“To put an end to this type of behavior, there has to be personal accountability. Consumers deserve better; our country deserves better,” Berger concluded. “Did the banks not learn anything from the financial crisis they caused?”
And while Wells Fargo terminated some 5,300 employees for opening up the accounts, the bank still fostered a system that allowed those employees’ actions to take place.
They were encouraged to do so, financially.
But will any of the bank’s senior executives be held responsible?
Probably not, as is par for the course with these types of situations.
The bank pays a big fine, promises changes, and moves on.
And the rest of us are left to sift through the rubble.
Same as it ever was. And probably the same as it ever will be. And that’s depressing as hell.
