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3 Problems With The Wells Fargo Cross-Selling Scandal

A Snarketing post by Ron Shevlin

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

By now you’ve heard about the Wells Fargo cross-selling scam, and hopefully read about it here on The Financial Brand. I’m not here to report the news, but to offer some alternate perspectives on it.

I’m sure that there are plenty of things wrong with this situation, but there are three things in particular that strike me as really screwed up about the whole mess.

Problem #1: The 260,000 Non-Fired Wells Fargo Employees

There are–oops, were–about 265,000 Wells Fargo employees. The 5,300 recently fired employees represent about 2% of the bank’s workforce.

So, that’s not a lot, right? Plenty of other large firms have done reductions-in-force of more than 2% of their total employee population, so this shouldn’t be a big deal, right?

Here’s the thing: A year ago, looking into the Wells Fargo employee evaluation system, these 5,300 employees would presumably have been among the top performers in the bank!

How much in bonuses do you think were paid out to the fired employees for their alleged superior “performance”? Moreover, how much in bonuses were not paid to the other employees who didn’t “perform” as well?

Do you see the problem here?

The consumers who were harmed by the illegal actions taken by the fired employees have the potential to recoup their losses and be compensated for harm done (although, I’m jumping the gun a bit here into Problem #3, so hang on for that).

But what about the ~98% of WF employees who honestly executed their jobs? What mechanism do they have to be compensated for the harm that was done to them?

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There’s something else troubling me here:

How did so many WF employees (at least 5,300 of them) know how to do what they did?

Do you really think that 5,300 WF employees individually came up with the idea of adding phony accounts and knew how to use the system to do it?

Folks, I can’t even figure out how to input my expense reports into my company’s system. How did 5,300 WF employees figure out how to add phony accounts?

Maybe there’s a Deep Wells Fargo website out there with instructions. Hey Wikileaks, can you look into that?

Problem #2: Anti-Banker/Pro-fintech Bias

If a handful of people from a particular ethnic background or religion were to do something wrong, and I condemned the entire ethnicity or religion, I would be excoriated on social media, and quite possibly fired from my job.

However, when a banker (or bankers) does something wrong, apparently it’s OK to condemn the whole lot of them. If you need any proof of this, my answer to you is threefold: 1) Wake up! 2) Elizabeth Warren; and 3) Bernie Sanders.

On the heels of the Wells Fargo scam, it’s no surprise that the anti-banker bias is rearing it’s head. I’ve come across countless number of examples over the past few days, but I’m not inclined to give those lunatics air time in a Snarketing post.

Then there’s the other side of this bias: The pro-fintech bias.

Some folks I know are planning to write an article on (in their words) “FinTech’s moral obligation to reform banking.”

Oh puh-leeze. Enough with the self-righteousness! I had two words for the would-be authors when I heard about this plan: Lending Club.

Fintech Mafia member Alex Jimenez said it best when he tweeted:


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Problem #3: Where Has All the Money Gone?

Where has all the money gone, long time passing?
Where has all the money gone, long time ago?
–with all apologies to Peter, Paul, and Mary

I completely understand why people are mad at Wells Fargo. What I don’t understand is why more people aren’t mad at the CFPB (and SEC and DOJ, for that matter).

Not long after the WF news broke, a friend of mine called for a class-action lawsuit.

Only thing is, we don’t need a class-action lawsuit. The CFPB took care of that with the $185 million fine it levied against Wells Fargo. Which, of course, will be used to compensate the victims.

Only thing is, that last sentence is complete fiction.

According to AlterNet:

Restitution for victims is rare, and constitutes a trivial amount of what the DOJ brings in. In 2011 the DOJ took in $2 billion in judgments and settlements, and only $116 million went to restitution.

The site went on to quote Barry Ritholtz of the Big Picture who said:

“Only a portion of the settlements collected go to the actual victims. For the most part the money is used to fund more investigations.”

Geez, how much does it cost to conduct an investigation? A pharmaceutical company could launch five new drugs with the kind of money the financial regulatory agencies are taking in.

But that’s the DOJ and SEC. The CFPB must be doing a better job, right? Not right. AlterNet writes:

The folks at the CFPB explained that when the bureau collects civil penalties, it drops them into the Civil Penalty Fund, which was established by the Dodd Frank legislation. The bureau will use the money in the Civil Penalty Fund to provide some compensation to victims, an amount which depends on various factors such as how much the victim has gotten from other sources.  When the CFPB can’t find the victim or determines, for whatever reason, that it’s not “practicable” to pay them, the money goes to “consumer education” and “financial literacy programs.”

The GAO issued a report about a year after the AlterNet article came out, reporting on where the CFPB-collected fines went. The report indicated that as of May 30, 2014, the CFPB had collected more than $139 million in civil penalties and allocated over $31 million to compensate seven classes of harmed victims.

Bottom line: Less than 25% of the fines collected by the CFPB were used to compensate victims.

Considering the amount of money collected by the CFPB over the past few years, if those funds went into effective financial education and literacy programs, we’d all be financial geniuses by now.

One more thing: The point regarding ‘not finding victims” better not be an excuse with the Wells Fargo scam. Since phony accounts were opened based on existing accounts, Wells Fargo’s KYC efforts ensures that they know who the victims are.

The Fourth Problem

I’m sure there a lot more problems associated with this mess than what I’ve included here. In fact, I know for sure that there’s a fourth problem, but it’s strictly just a personal problem that I have.

You might recall another post I wrote on the 3 Forces Challenging Facing Mid-Sized Banks and Credit Unions. One of those forces was the megabanks who are winning the Millennial market and making investments in the platformification of banking.

One fallout of this scandal may very well be a reversal in banking behavior among Millennials. They like to do business with firms they believe do good. Hard for me to believe that WF will escape declining sentiment in the short-term.

I might have to change my conference presentations. Shoot.

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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Comments

  1. Well written Ron, thank you.

  2. One more anecdote on the CFPB as it seems the bureaucrats treat themselves exceptionally well. So well in fact, I’d like a job working for them. During the first full year of operations (2012) the CFPB had 942 employees. In 2012, the average CFPB employee made $151,893. Not only did the number of employees grow since then so did the average salary. In 2016 the average salary for the 1,690 CFPB employees increased to $191, 715. That’s about a 5.5% year over year increase in salary. I can’t recall the last time I saw a bank give average raises of that size for 4 years in a row. So I would bet some of those fines they are collecting are going toward growing the bureaucratic infrastructure that Cordray has amassed.

  3. Maybe I should work for the CFPB. I bet they make tons of money not having to answer to anybody or deliver on their implicit promise to assist those wronged by the financial institutions.

    As for how it’s possible for 5,300 employees to know how to game the system, it’s really not rocket science. Any banker who’s been there for awhile knows what to do. Matter of fact, from what I’ve read, I would go as far as to point out what they missed when creating these fake accounts. I won’t publish them, but I can’t imagine that most bankers wouldn’t know how to “properly” open phony accounts to game the sales/incentive systems of almost every bank out there. We just don’t do it BECAUSE IT IS UNETHICAL AND WILL LEAD TO TERMINATION!!!!!

    Case in point, the Wells Fargo scandal.

    Sincerely,
    ARB–Angry Retail Banker

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