Big-bank CEOs have presided over a cornucopia of criminality in recent years. Their misdeeds are so varied and numerous that Wall Street begins to loom in the mind like some Hieronymus Bosch landscape, a scene whose occupants stun the imagination with the scope of their diversity and perversity.
And yet these top executives have managed to avoid being held accountable -- legally, financially, and even socially -- for their actions. Is that finally about to change? The Wells Fargo scandal may be remembered as the moment when top bankers finally began to pay a price for their actions.
Paying the Price
The State of California says it is suspending its "most highly profitable business relationships" with Wells Fargo for at least one year in response to the bank's "venal abuse of its customers," after that institution admitted to allowing (or encouraging) more than 5,000 employees to open some two million false accounts to meet sales quotas. Illinois is following suit, and the City of Chicago is considering similar action.
Nothing clarifies the mind of a bank board member than the loss of lucrative business deals. Wells Fargo's CEO says he will pay a penalty for presiding over his bank's fraud wave. Could stricter sanctions follow, perhaps even a criminal investigation?
We spoke with William K. Black Jr., economist and white-collar criminologist, about the implications of the Wells Fargo case and the laws that might have been broken. (See video above.)
The Lost Art of Shaming
Prosecutions are very important. But something else is also worth remembering. Once upon a time there were social penalties to be paid for immoral and illegal behavior, even when that behavior took place in America's boardrooms.
The fraudulent bankers who drove the savings and loan scandal of the Reagan era weren't just investigated and prosecuted. They were also condemned and ostracized. For a politician, to be associated with such a banker was to endanger one's political career.
But, somewhere between the 1980s and the 2000s, something shifted in American culture. CEOs whose institutions committed extensive fraud in the runup to the 2008 crisis -- and whose fraud typically continued afterward -- managed to escape criminal investigation. They weren't asked to return their ill-gotten gains.
Even their reputations didn't seem to suffer much. Politicians, including many Democrats, didn't hesitate to be seen in public with them. And instead of being socially ostracized, these bankers were often still lionized by financial reporters. Even now, JPMorgan Chase CEO Jamie Dimon -- who arguably runs one of the most crime- and scandal-plagued corporations in the world -- can say without apparent irony that he would "love to be president."
Surprisingly, and risibly, their opinion has even been sought at times on financial matters -- so much so, in fact, that some have funded advocacy groups like Third Way or teamed up with the right-leaning Peterson Foundation to attack Social Security.
That may be changing. Stumpf was brought before the Senate Banking Committee last month and subjected to unusually blunt interrogation. Sen. Elizabeth Warren pointed out that the value of Stumpf's own stock rose by roughly $200 million while the crimes were being committed. Much of that appreciation was due to Wells Fargo's "cross-selling" strategy -- the same strategy that pressured employees to falsify accounts -- as well as what Black described as the "far broader scandal" of selling "tens of millions of product to people … who were buying things that were bad for them."
Stumpf now says he will forego $41 million in stock options and salary while the bank's board investigates the scandal. This is important for a number of reasons. Stumpf, like Chase's Dimon, is accustomed to receiving hagiographic treatment by much of the media. His PR firm-driven reputation is that he is one of the "good bankers." Stumpf is, or was, given to opining in the press about his working-class upbringing and all the decent American values it instilled in him.
It's nonsense, of course.
Stumpf and his top lieutenants devised the cross-selling strategy that drove Wells Fargo's low-level employees to break the law and exploit hard-working customers. They hyped that strategy aggressively to drive up share prices. Stumpf repeatedly tried to demonize his employees, but Black offered a different perspective, describing them as victims "who were so successfully extorted that they allegedly made up these accounts."
The Buck Stops There
"I think we'll find that many of the people who were fired were actually the better people," said Black. "We know this from the CFO's testimony, who said (in effect) 'No, no, no, the people who did this … were not successful at cross-selling. They were the weak employees (who) refused to cheat people.'"
I asked Black about the pose Stumpf struck before the Senate committee, which was that of "the chief executive as innocent bystander" who couldn't possibly have know anything was wrong and who was now powerless to punish anyone for it.
"He is the latest in a long line of CEOs who have said exactly the same thing," said Black, about "the massive frauds that are at the core -- not the periphery -- of every one of our large banks in the US and Europe."
"Even by their own testimony," said Black, "these things can't be managed. Then they must be ended. And yet, when it comes time to doling out bonuses, Oh, man! The CEO is powerful … and should get, literally, hundreds of millions of dollars in compensation …"
Forced to defend that contradictory posture in public, Stumpf looked foolish. Now, in the face of ongoing anger, he has apparently been forced to give up tens of millions in compensation.
The CEO Playbook
Not that we should be in a hurry to feel sorry for him. There is much we don't know about Stumpf's 'sacrifice.' Was it future compensation, meaning he still holds stock that has appreciated $200 million in value? Was it taken from the same options, meaning he can still enjoy $159 million in stock gains? Is the board planning to quietly make him whole once the scandal blows over, as they no doubt hope it will?
We can assume that John Stumpf will remain financially comfortable. Nevertheless, financial penalties are one of the very few things that can get a top banker's attention. There are others. Black described a bank CEO's priorities this way:
1.) I don't go to prison. 2.) I don't lose my job. 3.) I don't have to pay back any of the fraud proceeds that I got --$200 million in Stumpf's case; and, 4.) I don't throw any of my other senior executives to the wolves in terms of criminal liability, because if I did they might flip on me and give testimony to the federal government and we might have prosecutions.
Were Crimes Committed?
Which raises the question: Could prosecutable offenses have been committed in Wells Fargo's executive suite? "Yes," said Black, "if they were on notice of it, or if they … deliberately prevented themselves from learning about it."
"According to Wells Fargo itself," said Black, "their folks committed two million felonies. And remember, this is just their version of it … an independent investigation is likely to find far broader frauds …"
What actual violations might have occurred? "Fraud, false statements to regulators, wire and and mail fraud, and identity theft in a number of cases, it appears."
I asked about Stumpf's responsibility under the Sarbanes-Oxley Act, especially if it turned out he had concealed important facts from investors. "Even without Sarbanes-Oxley (Wells Fargo executives) could be held liable for that," said Black, "but you're right that Sarbanes-Oxley added provisions designed to make it easier to go after CEOs who did exactly what appears (to have happened) here …"
Wall Street CEOs have worked very hard to restore their rightfully tarnished reputations. They are the economy's unclothed emperors, wearing invisible cloaks woven from strands of financial fraud, customer sucker-punching, and political cronyism. Their ill-gotten gains are evidence, not of financial astuteness, but of an unbridled thirst for self-enrichment.
The idea that they are smart and effective business leaders is the biggest fraud of all.
These merchants of mendacity should pay for their crimes the same way anyone else would -- by returning any wealth that was earned from fraud, by facing financial penalties and/or doing jail time where appropriate, and with the loss of public respect and status that comes with being a repeat criminal offender.
Will Stumpf or any other senior executives be subjected to deep and lasting financial penalties?
Will Stumpf be fired or asked to retire?
Will Stumpf or other senior Wells Fargo executives be criminally investigated for their roles in the commission of these two million felonies? (As Black points out, that number is the bank's own figure. An independent investigation might find many more.)
Will large investors like Warren Buffett (who reportedly lost more than $1 billion on Wells Fargo in a single day) do what they should have done long ago, and what the states of California and Illinois have now done, by parting ways with Wells Fargo until it cleans up its act?
Will Stumpf and his cronies find themselves shunned by the media, and by what was once known as "polite society"?
We won't know whether the Wells Fargo scandal represents a real shift in our nation's relationship with Wall Street until these questions are answered. If they are, and in the affirmative, we may finally be able to put an end to our nation's crippling epidemic of bank fraud. If they are not, we will all continue to pay the price for the greed and the crimes of a powerful, unaccountable, and conscienceless few.