by Roy C. Smith
The Wells Fargo case broke in mid September with the announcement of its $185 million settlement with the City of Los Angeles and banking regulators, just after my MBA course in Markets, Ethics and Law had begun.
We discussed the case extensively in class and quickly came to realize that (1) because of a seriously flawed bonus plan for branch employees, (2) a surprisingly large number of these employees had gamed the system over several years, opening 2 million or so unauthorized accounts, most of which were either closed or unused. (3) The bank earned very little from all this, and (4) customers who lost money were compensated so no real harm was done, but (5) it took the bank several years to clean up the problem, (6) which only came to light after an article in the Los Angeles Times that triggered the subsequent investigation by enforcement officials. The amount of the settlement was (7) quite modest compared to several multi-billion dollar settlements announced by other large banks for misconduct by employees that were inadequately supervised.
These facts were not enough to prevent the Wells Fargo case to go volcanic.
My students were able to observe that In just a few weeks of unrelenting pressure from politicians inspired by Sen. Elizabeth Warren and the public media, Wells Fargo’s CEO for the past decade, John Stumpf, has been forced to resign in disgrace, surrendering many millions of dollars of compensation and benefits to clawbacks and other penalties assessed by the bank’s board of directors.
Several other large bank CEOs have resigned since the 2008 crisis, none however as a direct result of a media avalanche following a settlement announcement. And none of the others, almost all of which presided over much more serious management failings than Stumpf, was clawed back and subject to other penalties by the board of directors.
Indeed, prior to the announcement of the settlement, Wells Fargo was the world’s most valuable bank (by market capitalization) despite being considerably smaller in total assets than its runner up, JP Morgan Chase. Wells’ stock traded at about 1.7 times book value when JP Morgan’s was at 1.0. Wells Fargo survived the 2008 crisis with no help from the Federal Reserve, and was the rescuing acquirer (without government assistance) of the failing Wachovia Bank, the fourth largest bank holding company in the US.
Arguably, at a time when the largest players in the global banking system have been seriously weakened by an increased regulatory burden, slow economic growth and government interference in markets (to the point of being unviable as continuing businesses -- see my previous posts on this subject) Wells Fargo was the only truly healthy bank among our largest players.
Clearly eight years after the crisis, American Bank Rage driven by politicians looking for headlines has not subsided at all. It has gone too far.