In a heated Senate hearing on Tuesday, Wells Fargo chief executive officer John Stumpf apologized for his bank’s misconduct in opening fraudulent accounts but maintained that the executives were not involved in the scheme – a statement that led to intense questioning from a panel of senators who believed otherwise.
"Our entire culture is centered on serving our customers and in this case we let our customers down," Mr. Stumpf read from his prepared statement at the hearing. "I do want to make clear that there was no orchestrated effort, or scheme as some have called it, by the company."
In the five-hour hearing, the panel pressed Stumpf on what the top executives knew of the scheme, with Sen. Elizabeth Warren (D) of Massachusetts delivering particularly tough remarks. They were critical of the actions taken to remove those involved in the the illegal practice, alleging that Stumpf only punished low-level employees while executives walked away scot-free with full compensation.
This latest bank scandal occurs during an election season when voter frustration with big corporations is reaching a peak following the big banks' role in triggering the economic recession. The Justice Department is still pursuing settlements with banks involved in the 2008 financial crisis, such as Goldman Sachs and Bank of America. Most recently, it handed out a $14 billion civil claim settlement offer to Deutsche Bank, who has refused to pay the amount. This case with Wells Fargo brings up questions again about whether sufficient checks and balances are in place to prevent violations from occurring again.
"The level of fraud that went on during those buildup to the financial crisis of 2007 and 2008 is apparently still going on," says Gerald Epstein, professor at the Department of Economics at University of Massachusetts Amherst, in a phone interview with The Christian Science Monitor. "The level of fraud has not been dealt with largely because the government hasn't pursued those that are primarily responsible for criminal action."
Professor Epstein says most of the punishments have been civil penalties in the form of fines – as it is for Wells Fargo in this case – in contrast with in the 1990s savings and loan crisis where bank executives were jailed for their actions.
"But it doesn't have the same deterrent effect because even though the fines seem quite large … it really doesn't put that big a dent in the profit of the banks, it puts almost no dent in the bonuses and salary of those who are responsible for this," Epstein says.
Regulation of banks and executive compensation is a politically divisive issue, with Democrats generally supporting tighter oversight and Republicans arguing otherwise. This Wells Fargo case, Bloomberg reports, might hurt a recent Republican effort to derail the Dodd–Frank Wall Street Reform and Consumer Protection Act that was signed into federal law by President Obama in 2010 and a proposed pay rule that will put restrictions on bonuses received by executives particularly for those under scrutiny for misconduct.
In 2013, the Los Angeles Times revealed that Wells Fargo had been opening accounts without customers' knowledge. A subsequent federal investigation found that bank employees opened 1.5 million fraudulent bank accounts and 565,000 credit card accounts from 2011 and 2015 to meet its aggressive sales targets. The Consumer Financial Protection Bureau levied a $185 million fine against the bank earlier this month. The bank’s net income for the second quarter of this year was $5.6 billion.
Since 2011, the bank fired 5,300 employees in connection with the fraudulent accounts, actions that the company has highlighted as evidence that it has responded swiftly and appropriately when it has become aware of wrongdoing. Members of the Senate Committee on Banking, Housing and Urban Affairs have been skeptical of that claim.
"I have often said that banking is based on trust and that trust was broken at Wells Fargo," said Sen. Richard Shelby (R) of Alabama, chairman of the banking committee in his opening remarks. "If there were ever a textbook case where consumers needed protecting, this was it."
The act of encouraging more accounts per customer is known as cross-selling, which has been credited with the increase in value of Wells Fargo stocks in recent years, as The Wall Street Journal reports. That rise in stock value was one reason the lawmakers believed that top executives couldn't have been ignorant about the scheme. They pressed Stumpf on Tuesday to institute compensation "clawbacks" – taking money back from compensations for misconduct – from the executives.
Senator Warren lumps Stumpf's actions with other Wall Street executives who walked away from financial scandals without penalties.
"This just isn't right. A cashier who steals a handful of 20s is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy," Senator Warren said. "The only way that Wall Street will change is if executives face jail time when they preside over massive frauds."
In a previous interview with The Wall Street Journal, Stumpf laid the blame on employees for conducting the illegal sales practices. He continuously deferred decisions to review the scope of the fraud and implement clawbacks to the company’s board, saying he will respect their decision.
But despite the grilling, analysts predict that the bank may not suffer much financially. Michael Mayo, an analyst with CLSA, said on CNBC on Tuesday morning that he would leave the earning estimates unchanged because customers will not leave the bank. Former General Electric chairman Jack Welch said the "case was not significant from a financial perspective." Morgan Stanley raised its rating for Wells Fargo as the fine "does not materially impact its earnings" and it sees no risk to the company's dividends, Reuters reports.
Carrie Tolstedt, the former head of the retail banking business is still set to retire later this year with $124 million in stocks and options, and Sen. Bob Menendez (D) of New Jersey points out that Stumpf still makes $19.3 million a year while the fired employees only earned between $35,000 and $60,000 annually.
One thing that did suffer was the company stock, which fell drastically, opening the door for JPMorgan Chase to replace Wells Fargo as the biggest US bank by market capitalization. But while still down from August, Wells Fargo's stock price rose again on Tuesday.
Democratic presidential candidate Hillary Clinton voiced her support for the fine in a statement earlier this month. Mrs. Clinton has called for increased regulation of big banks despite scrutiny on her ties with these corporations.
"There is simply no place for this kind of outrageous behavior in America, and I applaud the Consumer Financial Protection Bureau for its forceful response," she wrote. "[Republican presidential nominee] Donald Trump wants to dismantle the CFPB and repeal the crucial rules we put on Wall Street after the financial crisis, but yesterday's action is a stark reminder of why we need a strong consumer watchdog to safeguard against unfair and deceptive practices. And it's yet another example of how much is at stake in this election."
Mr. Trump has not issued any remarks on this ruling. Whether this issue will receive more spotlight under the current political climate, it’s hard to tell, especially when Trump vows to remove Wall Street reforms but at the same time criticizes big money in politics, Epstein says.
"This is going to be a big issue, it's something that people can relate to," Epstein said. "[But] it will be hard to see how it will play out."