In the wake of the financial crisis of 2008, would-be reformers of Wall Street have largely focused on the problems with letting big financial institutions mix commercial banking with investment banking. But the most recent banking scandal -- the revelation that Wells Fargo employees created millions of fake accounts for their customers in order to meet their sales targets -- is a reminder that big banks have an enormous drive to misbehave, even within the strict realm of traditional banking activities.
Big banks like Wells Fargo will continue to behave badly so long as they are allowed to quietly settle such "massive frauds" by paying fines that sound huge to ordinary people but in actuality are trivial to the banks.
Wells Fargo is not the only big bank plagued by scandals. Other leading banks, such as JPMorgan Chase, Bank of America, Citigroup and HSBC have also racked up a long list of banking crimes.
Driven by greed and unethical practices, most of the big banking scandals have been settled through multibillion-dollar fines. Wells Fargo's recent scandal showed how traditional fraudulent activities that originated five years back can result in loss of trust and faith of millions of customers. This month's scandal at Wells Fargo shows that big banks continue to get away with such acts by paying fines, often leaving the general public clueless as to what happened.
On September 8, Wells Fargo was fined $100 million by the Consumer Financial Protection Bureau (CFPB) for violating the regulations set under the 2010 Dodd-Frank Act. This was the largest-ever penalty levied against any financial institution in the CFPB's history. Other agencies charged the bank with an additional $85 million in penalties. But the banking scandal is not the first instance in which Wells Fargo has been charged by the CFPB. An earlier scandal by Wells Fargo involved levying illegal fees on student loans and failing to provide payment information to customers that they were entitled to receive. A penalty of $3.6 million was charged by the CFPB for that scandal.
In its most recent fraud, Wells Fargo's employees secretly created 1.5 million unauthorized deposit accounts for existing customers, who were unaware that they were being signed up for credit cards, debit cards and online banking services. Subsequently, passwords were generated for these accounts so that funds transfers could be made into the ghost accounts. According to the bank's analysis, its employees created 565,000 unauthorized credit card accounts so as to meet their sales target in order to get bonuses.
The unofficial accounts resulted in annual fees and other overdraft charges for existing customers. Over five years, as punishment, Wells Fargo has fired 5,300 employees in relation to fraudulent activities. In a statement, it said, "When we make mistakes, we are open about it, we take responsibility, and we take action." But according to Fortune, Wells Fargo Executive Carrie Tolstedt, who headed the false accounts unit, left the bank with $125 million as a bonus. A spokesperson for the bank said that the exit was a "personal decision to retire after 27 years" with the bank.
CFPB Director Richard Cordray told the Washington Post that he held Wells Fargo's corporate culture liable for allowing such "reckless, unsafe or unsound practices." Meanwhile, former Wells Fargo employees told CNNMoney about the unrealistically high sales targets set by their managers. A lawsuit filed against Wells Fargo in Los Angeles in May 2015 also reinforced the idea that the sales targets were coercively high: the suit said the bank's internal goal was to sell at least eight financial products per customer. In addition, the bank's "pressure cooker sales culture" was captured in 2013 by the Los Angeles Times, which reported, "anyone falling short after two months would be fired" at the bank. In order to meet sales targets, some employees pleaded with family members at that time to open ghost accounts. Amid these allegations, Wells Fargo officials have predictably denied the existence of a pressure-filled culture at the bank. Following the recent scandal, in an interview with the Wall Street Journal, Chief Executive John Stumpf said, "There was no incentive to do bad things."
But a repeated series of banking frauds raises many questions: Why do so-called "massive banking frauds" take so long to get detected by internal regulatory authorities? It took CFPB five years to fine Wells Fargo. If regulations are in place after 2008 crisis and internal monitoring authorities are cautious, then why aren't such frauds being detected at nascent stages to prevent additional damages?
The answer to this may typically lie in the vast size of the banks. Many of the ethical failures at large financial institutions have resulted from the growing size and complexity of banking structures, as well as from bad incentives. When ethical failures and lapses in banking supervision are not promptly detected at an early stage, these undetected frauds lead to larger damages. Breaking up big banks would lead to internal scrutiny of bank frauds by officials, help identify the root cause of the scandal and reduce additional damage at an earlier stage.
In addition, for change to happen, banks' misbehaviors need to be prosecuted so that they are not repeated. Often big banks pay fines for their wrongdoings and senior executives who made disastrous decisions or under whose supervisions the frauds took place largely escape punishment. No senior bank executives of big banks have been individually prosecuted over their roles in the financial crisis. CEOs and the senior executives involved in the frauds have all either voluntarily chosen to step down or have simply been sacked in the event of fraud detection.
The $185 million fine that Wells Fargo paid to CFPB and other offices and agencies is only 3.3 percent of the net income of $5.6 billion that Wells Fargo reported in its second quarter of 2016. Most banking frauds are being addressed with fines that may sound big but in actuality are trivial for big banks. Such frauds need to be treated as serious crimes and the banks involved should be held accountable for wrongdoings and investigated for negligence.