WTF WFC

So angry at Wells Fargo I’m thinking about closing all fourteen of my checking accounts there. ?

— Downtown Josh Brown (@ReformedBroker) September 9, 2016

I was going to do my regular linkfest today but it occurred to me that there’s nothing else worth talking about in the wake of yesterday’s bombshell reports about Wells Fargo. The recently created Consumer Financial Protection Bureau (CFPB) fined the bank $185 million for a widespread fraud wherein salespeople – thousands and thousands of them – opened around 2 million unnecessary new accounts for its customers in order to meet internal sales targets. Wells Fargo then fired 5300 employees who were involved. Fifty-three-hundred employees.

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.

Is this the Super Bowl of identity theft? How do we even process this? If 5300 employees are involved – and needed to be terminated – along with millions of accounts, then many people higher up in the food chain had to be aware. Or at least deliberately unaware: “Don’t loop me in, just hit the goddamn targets.” 

I have a few thoughts as this thing unfolds publicly…

1. 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.
2. The Chairman & CEO of Wells Fargo made $19.3 million last year, most of which came in the form of “performance bonus” pay. He made the same the year before. And what’s even better is that the company gets a write-off for paying that bonus in the form of stock options as opposed to cash, which means its effectively subsidized by taxpayers. Here’s how that works.
3. Of the 5300 people fired, how many were just following orders, being pushed by upper management to do this in order to satisfy whomever is up the tree diagram from them? How many even knew they were doing something wrong? Were any senior people shown the door? Who is the highest ranking executive, if any, to have been thrown out?
4. You guys know who pays the $185 million fine, right? Not the executives. The shareholders. That’s you. Wells Fargo is America’s most valuable bank by market cap at $250 billion. It’s held by Vanguard, BlackRock, Fidelity and virtually every other fund company in existence, which means you are indirectly a shareholder if you have a 401(k). Lots of ordinary investors hold the common stock of Wells Fargo in their personal accounts outright. Many more own it in mutual funds or ETFs. You’re paying. You.
5. Speaking of shareholders, do you know who the biggest holder is? None other than Warren Buffett’s Berkshire Hathaway. He has almost 9% of the company, holding roughly 440 million shares. In another era, Buffett found himself embroiled in a financial scandal as the Chairman of investment bank Salomon Brothers. There was a Treasury-fixing scam and Buffett found himself testifying before congress in 1991 about it. He said this: “Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.” Okay, I think this qualifies as “a shred of reputation”…I wonder how the ruthless part will manifest itself. We know he’s not going to sell his stake, as he’s a great admirer of the bank and its business. So who feels the wrath of Warren?
6. What happened here seems to be wholly consistent with one of the continuing messages of this blog – incentives explain everything. For gods sake I wrote about it yesterday! And a month ago! If you tie people’s pay or employment to a given outcome, you’re going to get more of that outcome. Which is fine, but there will be unintended consequences that may or may not be foreseen. In this case, ruthless new account opening targets led to 2 million fraudulently created accounts. Which is unbelievable, unfathomable. Until you remember that just a decade ago the same thing was happening with lending and mortgages.
7. This is way worse than JP Morgan’s “London Whale” thing. That didn’t touch anyone outside of a handful of traders in a remote office. This one involves ordinary people, lots of ’em. The scope of it is amazing, even if the dollar amount is not terribly consequential. Just the idea that something like this could be so widespread, within one of the most respected companies in America, is mind-boggling.

Anyway, these are some of the thoughts I had in reaction to the whole thing.

But now, the punchline: As of this writing, just before the market opens, Wells Fargo shares are flat. I wouldn’t be surprised if it actually ended higher on the day.

The fine is paid, a lot of people get fired and everyone learns a lesson, for at least a few minutes. Then business as usual.

A smaller financial institution or brokerage firm would be bankrupted for something like this. For something much less than this. Wells, however, will be just fine. That’s just the way it is.