Everything wrong with Corporate America: Wells Fargo
Unless you’ve been out of touch, you’ve probably read the recent articles regarding Wells Fargo’s recent activity of illegally and silently creating over 2 million credit card and deposit accounts against unwitting Wells Fargo customers! If that’s not enough, Wells Fargo then rewards its executive for this illegal behavior with a $125 million golden parachute on departure. If not, let’s explore.
Wait.. What happened?
To catch you up… Wells Fargo’s Community Banking division, the division which currently is (until the end of 2016) headed up by Carrie Tolstedt, had instituted sales quotas on credit card and bank accounts. This mean that the sales teams had to sell and open a specific number of accounts each day, week or month. These quotas lead to 2 million accounts being illegally and silently opened against people who had no knowledge of the card’s or account’s existence. Effectively, this is identity theft, right within the bank where you do business (assuming you bank at Wells Fargo).
This fraud was uncovered recently by the Office of the Comptroller of the Currency and the city and county of Los Angeles. Unfortunately, this illegal activity by this well known and respected bank is now putting that bank under fire, scrutiny and loss of trust. While that scrutiny is now a problem for Wells Fargo reputationally, the bigger problem is that these execs (who are clearly not executive material) end up walking away with millions of dollars in their pockets as rewards for wrongdoing.
This is the #1 problem with executives and executive compensation in America. Executives can now create and engage in illegal schemes, see them through to execution, then walk away as if nothing happened with huge piles of ill-gotten money. Though, I’m quite sure this problem extends to all parts of the world in all executive roles. It’s just that in America, white collar crime like this gets away with a slap on the wrist, millions of dollars in compensation and a shiny new executive job at another corporation. I wouldn’t be surprised to see Carrie Tolstedt named CEO at a new company.
What happened to real law enforcement?
It seems that law enforcement is only needed if, as a person, you rip off $500-1000, run a stop sign, have a rear tail light out or speed. As a corporate executive, you get a pass. Unfortunately too, Wells Fargo is a huge bank which underpins a huge portion of the economy. While I fully agree that this bank and all of its executives should be brought up on major and serious charges of fraud with each and every executive held accountable, it likely won’t happen. If this bank is “taken down” by the feds in rightful retaliation over this level of fraud, the economy will tank.
It’s a catch-22 situation. The government knows that if they even begin to touch Wells Fargo in any legal action, the economy will take a huge nosedive. Seriously, taking down a bank as big as Wells Fargo will have such far reaching ramifications across the globe. It could probably even spark a global financial meltdown. This is the reason AIG wasn’t taken down (or allowed to die) for its role in the housing bust and, instead, was actually bailed out by the government.
For this reason, the Consumer Financial Protection Bureau (CFPB) has instead only lightly fined Wells Fargo $185 million (only slightly more than the $125 million payday that Carrie Tolstedt walks away with) and is mostly chump change to a company like Wells Fargo. Though, the CFPB claims Wells Fargo’s $185 million is the largest fine it has ever levied. That may be the case, but it really is chump change to this bank. The “largest fine” statement is also just posturing for public approval. If you want to impose a truly large fine, impose a fine that makes a bank like Wells Fargo think twice about doing something like this again, like $1 billion. Worse, Wells Fargo likely won’t even have to pay the whole $185 million. Wells Fargo’s lawyers are likely to appeal and get it reduced (in a closed door agreement) to like $25 million (or less).
Let’s consider that the government bailed out Wells Fargo not that long ago with $25-36 billion in cash that Wells Fargo didn’t really need. So, it’s not like $185 million will even make a dent in the books at Wells Fargo. Wells Fargo likely made more than $185 million in interest alone holding onto those billions in federal aid, so this is basically the government slapping Wells Fargo on the wrist and taking back only the tiniest bit of money that Wells Fargo made off of holding onto that bailout money. Not to mention how that bailout money was even used… let’s just say, it was used less for bailing anything out than for advancing Wells Fargo’s business plan.
This is the reason the feds won’t touch banks when they run afoul with illegal and fraudulent activities. If Carrie Tolstedt and John G. Stumpf (CEO) see the inside of a courtroom over this issue either personally or as part of a Wells Fargo lawsuit, I’d be totally surprised.
Disavowing Knowledge and Placing Blame
John G. Stumpf has now firmly placed the blame on his staff for this activity. He is now attempting to disavow any knowledge of this scam. I call bullshit on that. You’re the CEO, if you don’t know what your direct reporting staff are doing with their teams, then you shouldn’t be a CEO. Sales goals are not set by the sales staff. Sales goals are set by the management team full well knowing what those sales goals might lead staff to do to make those sales numbers. When sales goals are too aggressive or too unreasonable or outright stupid, then corners are cut to make the numbers. And, that’s exactly what happened… corners were cut.
If a handful of accounts were created by one or two people, then you might be able to disavow this activity as rogue sales staff. But, since 2 million of these accounts were created by apparently 5,300 now-fired staff (more than a handful of people), there is no way that either Carrie or John can claim no knowledge of this activity or claim rogue staff. They may have even condoned the activities.
This is not only an illegal use of the bank itself, but it’s also an accounting scandal in and of itself. It means that Wells Fargo illegally reported earnings on accounts that shouldn’t have existed knowing that they shouldn’t have existed (hello KPMG). So, not only is the creation of the accounts a problem, it also means that Wells Fargo’s books now need to be 100% audited for any other illicit reporting activities. If this was knowingly going on directly under Wells Fargo’s executives’ noses (and KPMG’s noses), what else did they condone? This means restated earnings. Someone needs to crack those books open and now.
Eliminating Quotas by the end of 2016?
Seriously, Wells Fargo you were just called on the carpet for illegal activity, yet you are not stopping these sales quotas immediately? I mean, as in today? Wells Fargo has stated they will stop them at the end of 2016 coincidentally when Carrie Tolstedt walks away with her $125 million golden parachute.
Why wait an extra 3 months to cancel that sales quota activity? Why keep Tolstedt on board and reward her all the while keeping these quotas in effect? It’s what got you into trouble in the first place. If the sales team members were told to create fake accounts under real people’s names, what else might they be doing under these sales quotas? No, these quotas need to stop today, not in 3 months.
What are we teaching our children?
Here we have a well respected organization (or so we thought) … a bank … that is supposed to handle our money efficiently and we find a scam under the hood. That the money they have made off of that scam is diverted by the millions into executive salaries and compensation. This teaches our children that so long as we attend an Ivy League school, complete with a graduate degree in business and get a C-level executive job, we can line our pockets with cash no matter what illegal activities we perform against the public. And, we get away scott-free and never see the inside of a courtroom.
This is the whole reason executive compensation must be revisited and must also become regulated by the government, not by the corporation. If you make it to C-Level executive, then your position should be accountable exclusively to the government. Unfortunately, this goes against the tenets of private enterprise. But hey, I think it’s abundantly clear that there is no such thing as corporate governance. We’ve had so many of these issues year over year (Enron, Volkswagen, FIFA, Toshiba, etc). And now, we add Wells Fargo to that list and it’s time to put a stop to it. It’s quite clear that corporations cannot and will not govern themselves in an appropriate manner. When money is involved, stupidity reigns supreme. Working at a bank like Wells Fargo is a dream job for any would-be crook. You can basically set up any sort of ponzi scheme and completely get away with it. This is what we are teaching our children.
It must also become that each corporate executive is now held personally and legally liable and accountable for any wrongdoing performed under their watch as an executive for any company they govern (going all of the way to the CEO). The business itself should be held legally liable separately from any actions brought against each individual executive. No longer should ‘incorporation’ or ‘LLC’ shield executives from liability. No insurance policies should be issued or allowed to cover for such illegal activities. And… any ill-gotten gains received during their reign over illegal activities must be immediately forfeited to the government as a fine. Let these crooked C-level executives lose everything they own and end up in federal prison. These people do not deserve future jobs as executives.
There is no way Carrie nor John can deny knowing what went on in their organization. Only executives can require mandates which enact sales quotas over these types of sales activities. This meant that they were fully and completely aware of the activities of their sales staff. There is just no excuse for these types of behaviors from executives. However, it’s even worse that these corporations reward their executives with huge cash payouts when they allowed illegal activities to occur.