Part two of Elizabeth Warren's grilling of Wells Fargo CEO John Stumpf. The person Warren refers to at the start is Carrie Tolstedt, the Wells Fargo senior executive who managed the scheme. by Gaius PubliusI want to revisit the testimony of John Stumpf, Wells Fargo CEO, before the Senate Banking Committee, even though it was covered in these pages here. The focus of the earlier article was to list which members of that committee took pay-offs (campaign contributions) from the banking industry in general and Wells Fargo in particular (do click; it's an interesting list).Here I want to focus on Stumpf's testimony itself, thanks to a nice analysis by Yves Smith at Naked Capitalism. Smith is quite familiar with the finance industry, having been part of it for many years.The backstory is that Wells Fargo has been accused of having fraudulently opened thousands of unwanted customer accounts — opening credit card accounts, for example, for its mortgage customers — in order to sweeten its bottom line (fees and charges) and also sweeten its stock price (telling analysts, "Look at how successful we are at engaging our customers in more of our products than other banks are.")
The Consumer Financial Services Protection Bureau, the Los Angeles City Attorney, and Office of the Comptroller of the Currency fined Well Fargo a total of $185 million for opening unauthorized customer accounts, which the bank then used to charge fees. The bank has also agreed to make restitution to the defrauded customers. As the New York Times reports:Wells Fargo employees opened roughly 1.5 million bank accounts and applied for 565,000 credit cards that may not have been authorized by customers, the regulators said in a news conference. The bank has 40 million retail customers.This was an astonishingly brazen, large-scale effort, clearly a systematic, institutionalized campaign. It is virtually impossible for senior executives not to have known what was going on.
In the clip above Stumpf doesn't consider this a major problem, yet the scale of this fraud is breathtaking. Now let's look at the aftermath, as Smith sees it. She begins her piece:
It’s a safe bet that Wells Fargo CEO John Stumpf will be turfed out in the next ten days. Not only did he break the cardinal rule of executive survival, namely, throw someone under the bus when the going gets rough, but he couldn’t even manage a credible show of contrition and groveling after a massive fraud took place on his watch.As one Senator noted, the Wells Fargo fake accounts scam achieved a difficult feat: “For the first time in ten years, you have united this committee, and not in a good way.” Even Republicans like Paul Toomey used the “f” word, as in “fraud”.The chamber was packed, and the toughest interrogation came from Sherrod Brown, Bob Menendez, and of course, Elizabeth Warren, who reached new levels of bad-assery.
You can see that bad-assery in the clip. If you watch it, do stay for the last minute, in which Warren accuses Stumpf of allowing this scheme to continue because he personally benefited from it to the tune of a $200 million increase in the value of his Wells Fargo stock holdings. Control fraud at its best.Here are four takeaways via Yves Smith, and one from me, regarding these hearings and Stumpf's appearance. 1. How Wells Fargo's Control Fraud Worked Some of what Smith concludes, having listened to the hearings:
Wells Fargo had obvious, glaring control deficiencies that appear designed to give Stumpf and his fellow execs a “whocoulddanode?” excuse. The main audit functions sat in the business units, not the at the corporate level. It is a basic failure to have control functions report into profit centers. This is the structure that led to JP Morgan’s London Whale debacle and elicited incredulous reactions all over Wall Street. Tom Curry of the Office of the Comptroller confirmed that this was a serious deficiency. But that begs the question: how did regulators give this foxes run the henhouse organization a free pass?
Be sure to think that one through. The way this works is simple. If the auditors work for the boss of the profit centers, they're under the control of those bosses — hired, fired, promoted, demoted by them — and have every incentive to not blow the whistle. Again, control fraud.Also:
Despite saying he’d take full responsibility, Stumpf did nothing of the kind. Even though the press had already found a branch manager (who was later fired) warning him of abuses in February 2011, he says he didn’t have any idea there was a problem until sometime in 2013....
Smith adds more to the argument, but the bottom line is simple. Even though he said he didn't know, there's evidence he did.2. No One Who Benefited Will Have to Give Money Back Now about clawbacks — the bank taking back the money it gave to its fraudulent executives, in this case Strumpf and Carrie Tolstedt, the Wells Fargo senior executive who managed the scheme:
Stumpf refused to consider clawbacks. Stumpf will go down over this issue. He’s clearly more attached to keeping his gains than keeping his job. But what was revealing was his refusal to entertain them even for the conveniently recently retired Carrie Tolstedt, who is leaving with an exit package of an estimated $125 million in cash and equity prizes. Note that the financial press has reported that $17 million could be clawed back under the bank’s rules. When pressed, even though Stumpf kept maintaining the party line that Tolstedt had resigned, he said that the bank “wanted to go in a different direction” which is code for “she was forced out”.Senate Banking Committee chairman Richard Shelby rejected Stumpf’s refusal to consider clawbacks: “Explain to the public: What does accountability look like when an executive departs with millions of dollars?”
Tolstedt walks away (in retirement, not after being fired, as Warren discusses in the video above) with $125 million, almost as much as Wells Fargo will pay in fines ($185 million). Strumpf will walk away with his stock portfolio sweetened by $200 million. Much of his Wells Fargo stock was almost certainly given to him by the bank as part of his compensation package.3. Criminal Charges? Will there be criminal charges, at least against the bank?
Some of the actions look to set up a criminal case. I’m getting out in front of serious legal analysis, but some of the actions were so rancid that they would seem to set up criminal charges. The San Francisco bank would transfer money from deposit accounts to cover fees in unauthorized credit card accounts. In addition, bank employees would forge customer signatures to create phony accounts.In many ways, this is worse than the robosigning scandal...
Again, Smith has more, including the fun fact that one of the products that was fraudulently "sold" to unknowing customers was ... fraud protection.4. How Will Wells Fargo Undo the Damage to Customers? Smith makes several more points (do click through), but I want to close with just one more from her before passing to a point of my own.Keep in mind that part of the damage done to customers is this: Customer credit scores were negatively impacted by these accounts. Some customers with lower credit scores, for example, could easily have those scores dropped even lower simply by credit inquiries from Wells Fargo and by the appearance of even more credit accounts on their records. Others were certainly impacted by the appearance of unpaid late fees on these unwanted accounts. That results in real monetary damage, since it impacts the cost of loans those customers might want to take out, including mortgage loans. So the question is, how is Wells Fargo going to repair the damage done to its customers' credit scores. Again, the scale is huge; Wells Fargo issued over 500,000 unsolicited credit cards.Here's Smith's smart observation on Wells Fargo's proposed "remedy":
Stumpf conned the Senators and regulators about his credit score remedy, which is not about helping customers, but more damage control by the bank. Stumpf was pressed repeatedly on how he’d repair customer credit scores. And the correct answer isn’t hard: tell the credit agencies for each and every one of the over 500,000 credit cards that the credit reports should never have been pulled on them and that any late charges were the bank’s fault.But that isn’t what Wells Fargo is planning to do. Stumpf instead said the bank will go through the far more labor-intensive effort of calling each and every customer! Now why would the bank do that?To sell them again! That is, to try one more time to arm-twist the customers into saying that they will keep the cards, even if Wells faked their application....
In other words, instead of taking the cheaper and faster path — the bank contacts the credit agencies, delivers the list of fraudulent credit card numbers, and takes responsibility for any credit damage done — it wants to call each customer by phone instead. Smith's reasoning is, in my view, exactly right. The bank wants to get them to keep as many of those cards as it can.Your predatory capitalists at work.5. Will Stumpf and Tolstedt Go to Jail? Should They? Smith says in the comments that she doesn't think Stumpf will see a courtroom, much less jail (that comment section is worth a read, by the way). But he should. The Democratic nominee for president has issued a statement about the Wells Fargo fraud story, telling what she would do. One thing she didn't mention is ... putting John Stumpf and Carrie Tolstedt on trial.Should she say that? You might contact her campaign and express an opinion of your own. I'm sure they'd be glad to listen to potential voters, since there's an election on.GP