There’s never just one cockroach. If you see one in the open, you know many more are still hiding. Call the exterminator.
This time-honored rule also applies to banks. Earlier this month, we learned that Wells Fargo (WFC), ostensibly the most trustworthy of the too-big-to-fail institutions, is not trustworthy at all.
For years, Wells Fargo employees opened as many as 2 million of false accounts in real customer’s names. The bank will pay a $185 million fine, but not admit any wrongdoing.
So, we now see Wells Fargo executives apologizing profusely for conduct they won’t acknowledge was wrong, even though it clearly was. Welcome to “The Twilight Zone.”
We should also note that the federal exterminators who should watch for such pestilence had no idea it was happening. They jumped in only after a 2013 Los Angeles Times investigation by reporter E. Scott Reckard made local prosecutors investigate.
Wells Fargo says it fired 5,300 employees in response. It’s not clear this scandal was the reason in all those cases. But if so, it was good news. The big banks can fire people who break the rules. It’s not hard at all.
Having learned how to axe low-paid branch workers, Wells Fargo can apply this newfound discipline to headquarters staff and even the C-suite.
I know… Who am I kidding?
Absolutely no one with a seven- or eight-figure income will lose any pay over this, even though people at those levels designed the process that incentivized branch workers to open false accounts.
The executive in charge of the unit where all this happened, Carrie Tolstedt, was allowed to “retire” in July—and keep $124.6 million in bonus, stock options, and restricted stock. Had she been fired, as was certainly justified, she would have forfeited some of that pay.
Tolstedt failed to establish control systems to detect exactly this kind of behavior and stop it before it hurt customers. She was either complicit or clueless, either of which should have led to her termination with cause. But no, at Wells Fargo that only happens to hourly-wage people.
Under the Sarbanes-Oxley law, Wells Fargo CEO John Stumpf and CFO John Shrewsberry must personally certify that the bank has adequate financial and operational controls. It obviously does not. Their signatures on annual reports therefore constitute fraud, or at least willful ignorance. Will they suffer any loss?
No, they won’t. As it did with Tolstedt, Wells Fargo will enrich them further, even as branch employees lose their jobs and customers lose money.
(Side note: Letting Tolstedt retire and keep all that money would be an excellent reward for her not implicating higher-ups in all this. I have no evidence such was the intent, though.)
Aside from the fired worker bees, the only parties being punished are Wells Fargo shareholders. That $185 million fine, plus lost business and legal costs, reduces their asset value.
Worse, the regulators who should protect the public will do nothing to stop the similar misconduct that is surely happening at other large banks. There’s never just one cockroach.
Almost a decade after mortgage hijinks almost brought down the financial system, we seem to have learned and changed nothing. Our largest banks are far larger now than they were then. The next crisis will be worse than 2008.
When will it happen? No one knows, but I sense it is drawing near. My snail-mail and e-mail are both getting blasted with bank and credit card offers bearing insanely generous terms. Banks are aggressively taking more risks.
I remember getting that same kind of mail in 2007. We know what happened the next year.
Bubbles can only expand so far. We will all be in trouble when this one pops.
Patrick Watson is an editor at Mauldin Economics.