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Did financial regulators let Wells Fargo off the hook?

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No person was ever held criminally accountable for the bad behavior that led to the near meltdown of the U.S. financial system in 2008 and resulting Great Recession. The same may one day be said of Wells Fargo (WFC) for opening millions of fraudulent accounts on behalf of unsuspecting customers.

The scandal cost the bank $185 million in fines and about 5,300 employees their jobs. But given the monetary penalty represents only about 3 percent of Wells Fargo’s second-quarter profits, it’s arguably little more than a slap on the wrist. 

Why Wells Fargo CEO John Stumpf is on the hot seat

“If you analyze this from a textbook case, you’d have to say that management is responsible for a culture that has gone off the rails,” said Arthur Levitt, chairman of the Securities and Exchange Commission (SEC) from 1993 to 2001. “If we go on the basis of history, this will probably not get to the executive suite.”

“This appears to be a fairly widespread breakdown in practice across this part of Wells Fargo. You’d hope the [Office of the Comptroller of the Currency] OCC would have detected it,” said Clifford Rossi, a finance professor at the University of Maryland’s Robert H. Smith School of Business, of the agency’s role to oversee the safety and soundness of the nation’s banks. 

One former top financial regulator who helped prosecute more than 800 bankers in the savings and loan crisis during the 1980s and 1990s said the banks and other corporations protect those in the executive suites, leaving it up to government agencies to ferret out white-collar crime.  

Wells Fargo fined over fake accounts

“The issue is holding people accountable, and that they [regulators] failed to do,” said William Black, now an associate professor of law and economics at the University of Missouri-Kansas City. 

The Department of Justice (DOJ) has reportedly opened an investigation only now that Congress has called hearings to look into the matter on Tuesday, and the OCC had been collecting consumer complaints for years before taking part in the recent settlement, noted Black.

The Los Angeles city attorney sued Wells Fargo last May after launching an investigation following a 2013 story by Los Angeles Times reporter E. Scott Reckard, who detailed how branch managers where pressured to meet sales quotas and threatened with firings if they failed.

“After filing the lawsuit, the city attorney received more than 1,000 phone calls and emails from customers and current and former Wells Fargo employees across the nation about the issues raised in the litigation,” Los Angeles City Attorney Mike Feuer Achieves said in a statement.

The Wells Fargo employees who were fired during the last five years include those who failed to meet their quotas in addition to those who crossed ethical lines, said Black.

“LA county doesn’t have the resources or expertise to create the necessary reforms,” said Black. “The OCC said it was already collecting all kinds of consumer complaints, so why in god’s name are we three years later doing a settlement? And why did the criminal investigation just start, supposedly a couple of days ago, when we’ve known for over three years about this. Why?”  

Top executives at Wells Fargo oversaw a system in which “bosses get deniability, ‘we never told anyone to do anything wrong,’ but we created a compensation system that said, ‘if you don’t do this, you lose your job’,” said Black.

The long-running scheme at Wells Fargo brings to mind the “Gresham’s dynamic” theory coined by economist George Akerlof, which postulated dishonest dealings tended to push honest dealings out of the marketplace. 

“Bad ethics is the only thing that allows you to keep your job,” said Black. “If you create this kind of pressure, the people who prosper are those that cheat, and the big people may prosper to the tune of $120 million.”    

Ahead of the Senate Banking Committee hearing Tuesday, several members of the panel on sent a letter to Wells Fargo Chairman and CEO John Stumpf asking whether the bank would use its clawback authority to recoup compensation paid to senior executives, including Carrie Tolstedt, Wells Fargo’s former senior executive vice president of community banking. 

By all indications, Tolstedt is departing the bank with $124.6 million, without any indication she might be required to relinquish any of her pay, noted Fortune in a Sept. 12 article. 

A day later, CEO Stumpf said the bank was getting rid of product sales goals in retail banking, effective at the start of 2017, “because we want to make certain our customers have full confidence that our retail bankers are always focused on the best interests of customers.”  

“This was not the work of a few rogue employees over the course of a few weeks,” said the letter from the Banking Committee members, signed by Elizabeth Warren and four other senators. “Wells Fargo had a long-standing, systemic problem created by stringent sales quotas and incentives imposed by senior management.”  

After the financial crisis, Wells Fargo and other large U.S. banks vowed that bank executives would not be be allowed to reap rewards gained through misconduct.    

In scenarios where bad behavior could “reasonably be expected to have reputational or other harm to” Wells Fargo, unvested stock rewards could be recovered, according to the bank’s March proxy statement.    

A spokesman for Wells Fargo declined comment when asked about whether the bank would revoke compensation from Tolstedt, whose retirement was announced in July. In a statement, Stumpf called the 56-year-old Tolstedt a “role model for responsible, principled and inclusive leadership.”

“I don’t know precisely what the right penalty should be, but it’s probably not a matter of dollars and cents,” said Levitt, who added that the Federal Reserve would be in a better position to determine whether a bank is involved in more activities than it can effectively manage and whether they need to be curtailed.  

“The CFPB’s job is to identify issues regarding consumer protection and privacy,” said Rossi. “It really comes back to the OCC.” 

The OCC did not return requests for comment, while a spokesperson for the CFPB called its penalty “appropriate for the conduct and to deter similar conduct going forward.” 

A spokesperson for the DOJ said the agency could neither confirm or deny an investigation.

“The CFPB is the modern example of, ‘in the valley of the blind, the one-eyed man is king’, compared to their absolutely pathetic counterparts,” said Black.

Blue-collar criminals meet their lawyers for the first time in a jail cell, while for white-collar crime, “the lawyer is there helping you implement the program,” said Black, who said the latter crime is prosecuted only when an agency like the OCC makes a criminal referral to the DOJ. 

He added: “Corporations, including banks, don’t make criminal referrals against their CEOs.”  

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