I have a friend who screams bloody murder when you mention anything about Big Banks. He’s convinced they are all things but good, and refuses to put his money in them because he fears that in some way, at some point, he’ll be burned.
Wells Fargo has played right into his logic. The world’s third largest bank has been caught up in a scandal that has threatened and even ruined its relationships with its customers. Its problems relate to what is seemingly a systemic practice of setting up fake accounts in the name of its customers to get more money out of them in the form of fees and commissions.
In addition to the 2.5 million such accounts revealed last year, the bank today announced it had found a million more!
Without their permissions, or knowledge, some members of Wells Fargo’s retail department seemed to develop the nasty habit of setting up these fictitious accounts, prompting the bank to launch an investigation to measure the extent of the scandal. Noteworthy is that the investigation was only launched after a newspaper reported on a whistle blower’s tell-all on the fraud going on at the bank. The investigation was conducted by a third party, which has concluded its effort and reported its findings back to the bank.
The results are astounding, to say the least, prompting famed market player Jim Cramer to call Wells Fargo a rogue bank on CNBC Thursday morning.
That original investigation reviewed roughly 93.5 million accounts of current and former customer accounts opened between 2011 and 2105 were reviewed. Of those, 2.1 million “potentially” unauthorized accounts were uncovered.
Buffet and the cockroach theory
Warren Buffet, whose Berkshire Hathaway is Wells Fargo’s largest shareholder, chimed in on the Wells Fargo debacle this week with the adage about cockroaches. If you find one in the kitchen, there are bound to be many more. In essence, Wells Fargo’s initial findings that some of its employees were up to no good, likely meant that there were many more given the number of employees who work there.
Indeed, Buffet was correct.
Wells Fargo’s initial findings prompted the bank to expand its investigation, so another 165 million retail banking accounts opened between 2009 and 2016 were also reviewed. From that investigation, another 3.5 million potentially unauthorized consumer and small business accounts were unearthed.
What’s worst is that some of these unauthorized accounts incurred fees. The bank says about 190,000 incurred fees and charges, up from 130,000 previously identified accounts that incurred fees and charges.
Wells Fargo says it will provide a total of $2.8 million in additional refunds and credits on top of the $3.3 million previously refunded as a result of the original account review.
Why, just why?
When the tomfoolery came to light last year, the blame game began immediately, with low level employees being fired for setting up the accounts. Many shot back that they were simply following the orders of the company’s top brass, members of which baited them with hefty commissions and the like if they hit lofty sales goals.
As all the blame went back and forth, one fact became clear. Wells Fargo’s employees in its retail banking sales division were incentivized to cross-sell Wells Fargo products.
Heads rolled and compensation of those in charge was clawed back. The whistle blower, Claudia Ponce de Leon, was fired. CEO John Stumpf went into retirement, and Carrie Tolstedt, who appeared to be the ring leader of the enterprise in her role as head of the community bank unit, was fired.
Also fired were about 5,300 employees who were accused of setting up the phony accounts. However, unlike Stumpf and Tolstedt, who walked away with millions of dollars in compensation, the employees who actually carried out the dirty deeds received nothing but their walking papers.
Wells Fargo still faces fines from the federal government from its “rogue” sales practices. It’s said no more personnel changes will be made, so no more firings.
In the meantime, the bank’s reputation has been forever damaged, especially in the minds of people like my friend’s, who said to me simply, “I told you, so.”