Wells Fargo Shows Need to Break Up Banks

Wells Fargo CEO John Stumpf appeared before the Senate Banking Committee on Tuesday to assuage lawmakers’ concerns about the massive bank’s management practices. Instead, some questioned if the firm should even legally exist.

Stumpf apologized for recent revelations about the bank, which was found to have opened more than 2 million accounts in their customers names, without proper authorization, to boost sales numbers. But he stressed that the wrongdoing was carried out by “only one percent” of the bank’s total workforce of 100,000 employees.

Senators responded to Stumpf’s claims by noting they would fuel calls to forcibly dissolve the largest banks in the country — institutions that have been under increased political scrutiny since the financial collapse of 2008, the subsequent trillion dollar bailouts, and the lack of criminal prosecutions for fraud that led to the meltdown. Wells Fargo is the second largest bank in the US by market capitalization.

“Every time you say that,” Sen Jon Tester (D-Montana) remarked about Stumpf’s one percent talking point, “you give ammunition to the folks who want to break up the big banks.

“Fifty-three hundred people is more people than live in most towns in Montana,” Tester added. Wells Fargo executives have bragged about firing that number of employees, since the alleged fraud was first revealed earlier this month, after regulators fined the bank $185 million for its misdeeds.

“Why isn’t this crystal clear proof that an entity as big as Wells is not only ‘too big to fail,’ but it’s too big to manage, and it’s too big to regulate?” Sen. David Vitter (R-La.) asked, in reference to the delay between one thousand firings in 2011 and high-level awareness of systemic problems in 2013.

Sen. Bob Corker (R-Tenn.) also expressed disbelief about the lack of real-time detection.

“With all the data you use to contact customers — with algorithms, you guys can pick this stuff up so quickly, it’s hard to believe that there isn’t some report within the bank that would cause this to jump out at people and say ‘something really bad is happening here,” Corker said.

Corker, ironically, also expressed bewilderment that the alleged fraud wasn’t detected because of banking compliance officers, noting: “Y’all are regulated to death.”

Stumpf responded to criticism of the bank’s structure, by claiming, as he did to Vitter, that the matter was a “problem of focus, not size.”

Senators, however, responded to Strumpf’s insistence on the problem being caused by a few bad apples, accusing high-level executives of scapegoating the rank-and-file.

“In the last week, you and your Chief Financial Officer have taken to the press and laid the blame squarely on low-paid retail bank employees,” Sen. Bob Menendez (D-N.J.) said. “And while I don’t excuse what they did by any stretch of the imagination, I find that despicable.”

Sen. Jeff Merkley (D-Ore.) described the bank’s policy toward “cross-selling” — the practice of encouraging customers to sign up for additional products — as creating a “pressure cooker environment.” He said it led to employees fabricating new account registrations, with workers reporting they faced termination if they didn’t meet sales targets.

In the wake of the scandal, the bank said it stopped cross-selling.

Sen. Elizabeth Warren (D-Mass.), meanwhile, pointed out how the practice helped Stumpf’s net worth balloon by $200 million, citing repeated earnings calls in which he praised cross-selling.

Warren also called on the Justice Department and the Securities and Exchange Commission to criminally investigate Stumpf, during her first round of questioning.

“This just isn’t right,” Warren said. “A cashier who steals a handful of twenties is held accountable. But Wall Street executives almost never hold themselves accountable — not now and not in 2008.”

The Justice Department is investigating Wells Fargo, it revealed last week, and it hasn’t taken criminal charges off the table.

The SEC has not yet made an announcement about a probe. On Tuesday, both Sens. Merkley and Pat Toomey (R-Pa.) suggested that the company may have violated securities laws, by failing to disclose back in 2013 that it was being investigated for this 2 million account fraud.

Stumpf responded at the hearing that this wasn’t disclosed by executives to the SEC, because the dollar amount of the alleged fraud was only $2.6 million.

Wells Fargo is among five banks that was officially considered this year by federal regulators to be”too big to fail” — too large and intertwined with the wider financial system to go bankrupt without causing widespread instability, in the absence of a taxpayer bailout. The other four were JP Morgan, Bank of America, State Street, and the Bank of New York Mellon.

In April, the Federal Reserve and the Federal Deposit Insurance Corporation said that the banks submitted insufficient “living wills” — plans for bankruptcy resolution that “systemically important financial institutions” must submit, under Dodd-Frank.

They are required to submit revised plans by Oct. 1. If the Fed and FDIC again find the living wills to lack credibility, they can impose penalties, including limited dissolution orders.

In testimony before the Senate Banking Committee in June, Fed Chair Yellen Janet Yellen downplayed the possibility of those being imposed.

“Dodd-Frank does say that the FDIC and the Fed can impose higher capital requirements, higher liquidity requirements, or ultimately structural changes,” she said. “I don’t expect to have to go there.”

UPDATE (Sept. 24, 2016): This article was corrected after we were contacted by Wells Fargo Assistant Vice President of Corporate Communications, Erika Reynoso, and advised of an inaccuracy. The bank and its CEO John Stumpf did not admit to “having fraudulently opened more than 2 million accounts in their customers names,” as the article had previously stated. As Reynoso pointed out, the consent order signed by the bank with the CFPB merely acknowledges that 2 million accounts “may not have been authorized” by its customers. We regret the error.

A review of the transcript from Tuesday’s panel with Stumpf, however, shows that thirteen different senators, both Democratic and Republican, either questioned the CEO about “fraud” or described Wells Fargo’s 2-million-account sign-up as “fraudulent.”

“The definition of fraudulent — God bless Black’s [Law] Dictionary — if I didn’t sign for it, it’s fraudulent,” Sen. Tim Scott (R-S.C.) said, for example. “I like to have simple definitions.”

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