Wells Fargo & Co.’s ability to perpetrate a financial fraud involving 5,300 employees and 2 million phony accounts is the latest example of how banking regulation has failed, says Adam Davidson, a contributing writer for The New Yorker magazine.
“Bad behavior should lead to fines large enough to infuriate shareholders and cost CEOs their jobs,” he writes. “What’s more, these executives need to know that they will face criminal prosecution when they direct or ignore criminal activity.”
The Consumer Financial Protection Bureau last week was among the banking regulators that fined Wells Fargo $185 million for abusive sales practices. The bank paid another $5 million to customers for creating more than 2 million fake accounts for products like credit and debit cards to meet aggressive sales targets. Wells Fargo had net income of $23 billion on revenue of $86 billion in 2015.
Carrie Tolstedt, the executive who oversaw the Wells Fargo unit where the fraud occurred, is due to receive about $125 million in pay as part of her retirement package. In the July announcement of her exit, which didn’t mention of the phony account investigation, Wells Fargo CEO John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture” and “a champion for our customers.”
Bank employees don’t have enough disincentives to prevent bad behavior, The New Yorker’s Davidson writes.
“There is no evidence that John G. Stumpf, the CEO of Wells Fargo, was involved in the scheme to defraud the bank’s customers. If bank regulation were doing its job—if he’d feared a job-threatening fine—he would have had the incentive to find out about it and stop it,” according to Davidson.
Instead of paying any price for failing to monitor his bank, Stumpf has piled on the accolades and continues to have a key advisory role with the Federal Reserve, the same central bank that sleep-walked through the dot-com and housing bubbles.
“Early signs of this scandal were covered in 2011, and then widely revealed in 2013. That year, Stumpf won the Euromoney Banker of the Year award,” Davidson writes. “Last year, Stumpf was named Morningstar’s CEO of the Year, and made nearly $20 million. This year, he was reappointed to the prestigious Federal Advisory Council, a group of twelve bankers who are trusted to give guidance to the Federal Reserve Board of Governors.”
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