With the NFL back in season (Pats 2-0 for those keeping count at home), the term “Greatest Show on Turf" is getting thrown around an awful lot these days. And while the NFL and its players are usually the Greatest Show on Turf, this week, the Senate Banking Committee hearing with Wells Fargo's CEO might have given the league a run for its money but for two reasons.
The first is that this is, of course, not a show but a very serious meeting with a rather irate body of elected officials looking to get to the bottom what was, at its core, a very, very serious breach of consumer trust.
Also, there is no astroturf in the U.S. Senate.
Though we have a feeling that, at some point in the middle of today's (Sept. 20) hearing, CEO John Stumpf is going to rather strongly wish there were. Being tackled by a 250-pound linebacker might seem more fun since, as Ricky Ricardo so eloquently put it, Stumpf has some ‘splainin’ to do.
A Brief Glance At The Story So Far
Wells Fargo is far from the first bank to be fined by the CFPB.
JPMorgan Chase, Citibank and GE Capital are just a quick listing of the banks that have been ordered to pay out multiple hundreds of millions by the CFPB. Bank of America’s ordered payout by the CFPB was clocked in at nearly $800 million. Wells Fargo, by comparison, was asked to shell out a mere $183 million — a little under 10 percent of what the bank announced it had reserved for litigation ($1.3 billion).
But Wells Fargo’s fine stands out for two reasons.
One is that it is the largest fine ever actually imposed by the CFPB. Those big payouts were mostly paybacks to millions of customers; the reason the banks were being fined (among other reasons) was overcharging consumers for services never rendered. In this case, Wells has already paid back most of the money consumers were wrongly charged — the payback part of the order is only $5 million. The other $185 million is all fine, $100 million for the CFPB and $85 million for the Comptroller of the Currency.
Also, Wells Fargo managed to get everyone’s attention with what it was caught doing — creating 2 million falsified consumer accounts. Over the course of several years, Wells Fargo employees were caught signing their customers up for credit cards they never asked for and bank accounts they didn’t need.
Sometimes, they lied and said the credit card was an account requirement; other times, they dispensed with the formality of telling the consumer anything at all and simply used their data and some forged signatures to create cards ex nihilo.
When consumers complained, they closed their accounts. Employees were fired — 5,300 over the course of several years out of branches all over the United States.
Those employees, however, seem to be lower-level branch workers and managers. It is unknown if any higher-level executives have been fired in connection with the scandal, though all signs at the moment point toward no.
Most notably, the top dog, CEO John Stumpf, on who’s watch this was done, still collects his Wells Fargo paycheck. And in the days after the fine and gory details emerged, he told the world that he was responsible — but also not going anywhere.
“I think the best thing I could do right now is lead this company and lead this company forward,” Stumpf said in a CNBC interview last week.
Will Congress agree? Well, today (Sept. 20), Mr. Stumpf will go to Washington, and we’ll get the verdict straight from those congressional horses’ mouths.
What Stumpf Is Likely To Hear A Lot About
We can expect a free-wheeling time during the hearing. The majority of Democratic senators on the banking committee have already called publicly for Stumpf’s termination, and no one has been louder than big banking's nemesis, Sen. Elizabeth Warren (D-MA).
The same woman who gave us the CFPB. And now, thanks to the actions of Mr. Stumpf and his merry band of rogue relationship sellers, Wells Fargo has cemented that regulator’s role into the fabric of banking oversight in much the same way as the FDA is in overseeing matters of public health.
When the grilling starts, there are probably some watch words to listen for.
Toxic Sales Culture
The story out of Wells so far is that a few bad eggs — spread across a variety of banks over the course of years — independently acted to break the law and fraudulently set up millions of accounts. Stumpf and other senior banking officials seem to maintain that these 5,300 people just went rogue — in the same way, at approximately the same time and for reasons not at all connected to the bank's incentive structure.
That explanation is less than compelling to most observers, given Wells Fargo spent years crowing quite publicly about its remarkable prowess at cross-selling its products to existing consumers. Cross-selling even had its own special name at Wells, “Gr-Eight,” which was meant to remind employees that eight financial products were the goal for each and every one of their households. Employees who hit that target were rewarded; those that didn’t were reportedly fired.
And that incentive structure — built as it was — created what Steve Morang, president of the 1,500-strong San Francisco chapter of the global Association of Certified Fraud Examiners (ACFE), called the “holy fraud triangle.”
The ACFE works to reduce the incidence of fraud and white-collar crime and to assist members in fraud detection and deterrence.
Morang noted that it was pressure, opportunity and rationalization — the three elements that lead to massive cases of institutional fraud of the type seen at Wells Fargo. The incentive/firing structure created both the pressure and the rationalization, which meant that all that was left was opportunity.
“Employees could rationalize that they’d lose their jobs otherwise and that everyone else was doing it. There’s a million rationalizations you can have. That’s the easy part of it. The scary part is they had opportunity. It actually worked.”
And that scary part about it actually working is also probably what Stumpf will hear a lot about.
Accountability (Who’s Getting Fired Here?)
Stumpf has already said that, for the time being, he is not going anywhere. We imagine he will be asked some questions about that choice, and at the end, that decision won’t be his to make.
Also likely to come up will be the fate of outgoing Head of Community Banking Carrie Tolstedt, who is slated to receive $124.6 million for her heroic efforts that helped the bank recover after the financial crisis. Unfortunately included in the “efforts” of her unit were those 2 million fraudulent accounts, which has left many wondering if her retiring as a hundred millionaire is a bit gauche.
There’s no business like “grow” business — the Wells Fargo way.
And Wells Fargo has a clawback policy (according to regulatory filings reviewed by Bloomberg) that would allow the bank to recoup about $17 million in unvested shares from Tolstedt. Though this would only make her somewhat less rich, expect to hear senators ask about that clawback provision a lot.
And why the rules shouldn’t be tossed when there is, oh, fraud involved.
The final area of questioning Stumpf will likely face is how everyone managed to be so surprised by this news, since Wells did not mention it was under investigation by the CFPB in its SEC filings or investor calls. It did set aside funds sufficient to pay the fine, but it never exactly mentioned that the fine might be coming (or what it was going to be for).
Wells Fargo has lost about 7 percent of its value since the CFPB leak came out. Its investors would probably say something that can cause a 7 percent drop in a couple of days is material information.
Did we hear someone mention the word "transparency?"
Stumpf — and probably Tolstedt — have only begun their fun with the United States Congress. The House Financial Services Committee is also planning on investigating the Wells Fargo fake account scandal. That hearing will take place later in September.
And Wells will have to face the wrath of the sector.
“If the head of the company is allowed to walk away from a scandal of this kind of company-defining scale, it can never again be the bank that ‘make[s] it right by the customer every time,’” MarketWatch opinion writer Tim Mullaney noted.
Still, some of Wells' investors are a bit more sanguine and perhaps will ride this out.
“The guy is not a screw-up. He has done major positive things for the company,” noted Wells Fargo investor Bill Smead in a recent phone interview. “But this is a major screw-up.”
A screw-up that, as a final punchline, was a money loser even before the fines and the ocean of bad PR.
According to one set of calculations, Wells Fargo didn’t actually make money doing this. One analyst doing some back-of-envelope math for Forbes noted that the staff time that went into falsifying accounts, bonusing employees for reaching their sales quota and then refunding consumer fees when they got caught cost a little over $7 million. At best, Wells Fargo generated about $2 million in extra fees. All in, falsifiying those accounts to inflate their numbers cost $5 million.
Or, at least, it did — the bill is running a lot closer to $200 million these days.
If you want to keep up with the fun in the Senate today, check in with PYMNTS on Twitter. We’ll make sure to keep the greatest hits coming.