Wells Fargo’s Asset Cap Provides for Experimental Enforcement Action

Off the heels of the 2008 Financial Crisis, in which the world's largest banks all played a part, the United States’ poster child for good banking behavior, Wells Fargo, was found out to be near rotten to the core. (Ben Protess, et al., New York Times). After over 1.5 million fraudulent bank accounts and half a million unauthorized applications for credit cards later, regulators decided that unprecedented fraud might best be sanctioned with an unprecedented penalty. (Press Release, Federal Reserve).

Perhaps the most notable aspect of Wells Fargo’s penalty is an ongoing restriction on the bank’s overall growth. (Wells Fargo Consent Order, Federal Reserve). In its initial press release outlining the penalty, then-Chairwoman Janet Yellen stated that the enforcement action “will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.” (Press Release, Federal Reserve). The Federal Reserve does not intend to lift its “asset cap” restriction on Wells Fargo until the bank submits and implements a comprehensive risk management program. Id. Among many reforms Wells Fargo must make, its latest reform involves the bank’s performance management processes and its sales compensation and incentive schemes. (Wells Fargo Consent Order, Federal Reserve). These processes and schemes will be scrutinized and observed until they are consistent with Federal Reserve risk management objectives, Wells Fargo’s policies, and applicable laws and regulations. Id.

Wells Fargo has certainly taken a hit since the asset cap was imposed; almost $4 billion in profits, by one estimate. (Hannah Levitt, Bloomberg). Further, Wells Fargo has lost about $200 billion in market value since the restriction began, though most of that can be blamed on the pandemic’s effect on the market as a whole. Id. As far as monetary penalties go, however, the asset cap on Wells Fargo does not appear to be as harsh as fines on banks in the past.

For example, J.P. Morgan Chase reached a total settlement of $13 billion in 2013 to settle a multitude of investigations by the U.S. Department of Justice in connection with the bank’s involvement in mortgage bonds gone toxic. (Karen Freifeld, et al., Reuters). In 2014, BNP Paribas agreed to a $9 billion fine to settle investigations with the Department of Justice over the bank’s dealings violating sanctions against Sudan, Iran, and Cuba. (Nate Raymond, Reuters). But, if the goal of such penalties is to recover damages and encourage better behavior in the future, an investigation into the effectiveness of such penalties is required.

The behavior that occurred at Wells Fargo that eventually led to the massive amounts of fraud existed at the sales level. One former employee described the pressure to make sales goals as tense, stating that, if a salesperson was not able to make their daily sales goal, “you’d have to call in the afternoon to explain why you didn’t make it and how you were going to fix it.” (Bethany McLean, Vanity Fair). Bankers were drilled to sell at least eight consumer products a day, with some employees pleading customers to take out a new loan and then turn around and pay back a portion of that loan in order for the banker to get credit for the sale. Id. Of course, the practice didn’t stop there, as the sales pressure eventually led to the fraudulent numbers everyone knows about today. Id. In fact, with some branches, sales quotas would have been impossible to meet without committing fraud. Id.

But during that time, Wells Fargo was able to report strong numbers, increasing their market cap to a high of $178 billion in 2011, up from $102 billion in 2005. (macrotrends.net). Then-CEO John Stumpf, now banned from the banking industry for life, received total compensation of $19.3 million, mostly from performance bonuses, in 2013 alone. (Rick Rothacker, Reuters). Fraud, it seems, was able to breed so well at Wells Fargo because of those who stood to benefit from its existence.

And that culture was able to survive so well for so long at Wells Fargo because when John Stumpf was finally forced out as CEO of Wells Fargo in 2016, he walked out with around $130 million from stocks and an exit package, plus the tens of millions he’d made each year before as CEO. (Matt Egan, CNN). The same golden parachutes have been attached to nearly every other executive forced out as the result of legal scandals, take Tyco’s CEO walking with $150 million after a massive accounting scandal in 2002. (Max Nisen, Business Insider). Another example is Volkswagen’s CEO leaving with upwards of $67 million after lying about emissions tests. (Jena McGregor, Washington Post).

The idea of the “golden parachute” thus appears to underpin the incentive for many executives to stretch, or, in the case of Wells Fargo, break the bounds of acceptable practices in order to increase their overall bonuses. In fact, the only banking executive who received jail time as a result of the 2008 financial crisis was Kareem Serageldin, an executive at Credit Suisse who helped to hide hundreds of millions in losses on the bank’s mortgage-backed securities portfolio. (Jesse Eisinger, New York Times). This, of course, is despite the fact that so many other institutions falsified their reports as well, including Merrill Lynch, AIG, Countrywide, and Lehman Brothers. Id.

The success or failure of the asset cap assigned to Wells Fargo cannot be determined for some time. Even when the asset cap is lifted after reforms are put in place, the new compliance procedures could prove to be just as much a sieve for fraud as the old procedures. For instance, during the ongoing fraud, many employees were noted to have reached out to supervisors explaining how practices they witnessed were in violation of internal ethics policies, but their voices were wholly ignored. (Bethany McLean, Vanity Fair). If the asset cap works, and Wells Fargo is found to have no instances of fraud, then score one for Janet Yellen. But if not, and the next penalty brings in only the potential for jail time, then so be it.