Banking behemoth Wells Fargo, one of the world's largest financial institutions, was fined a mere $185 million by various regulators on Thursday for opening millions of unauthorized accounts that racked up fees for consumers and bonuses for employees.
The biggest fine came from the Consumer Financial Protection Bureau (CFPB), which levied its largest-ever penalty: $100 million. The Los Angeles City Attorney and the Office of the Comptroller of the Currency were also party to the settlement.
"Wells Fargo employees secretly opened unauthorized accounts to hit sales targets and receive bonuses," said CFPB director Richard Cordray on Thursday. "Because of the severity of these violations, Wells Fargo is paying the largest penalty the CFPB has ever imposed."
According to the CFPB, those violations included:
- Opening deposit accounts and transferring funds without authorization: According to the bank's own analysis, employees opened roughly 1.5 million deposit accounts that may not have been authorized by consumers. Employees then transferred funds from consumers' authorized accounts to temporarily fund the new, unauthorized accounts. This widespread practice gave the employees credit for opening the new accounts, allowing them to earn additional compensation and to meet the bank’s sales goals. Consumers, in turn, were sometimes harmed because the bank charged them for insufficient funds or overdraft fees because the money was not in their original accounts.
- Applying for credit card accounts without authorization: According to the bank's own analysis, Wells Fargo employees applied for roughly 565,000 credit card accounts that may not have been authorized by consumers. On those unauthorized credit cards, many consumers incurred annual fees, as well as associated finance or interest charges and other fees.
- Issuing and activating debit cards without authorization: Wells Fargo employees requested and issued debit cards without consumers' knowledge or consent, going so far as to create PINs without telling consumers.
- Creating phony email addresses to enroll consumers in online-banking services.
In addition to the $185 million in fines, Wells Fargo will refund all affected consumers, to the tune of roughly $2.5 million.
"When I worked at Wells Fargo, I faced the threat of being fired if I didn't meet their unreasonable sales quotes every day, and it's high time that Wells Fargo pays for preying on consumers' financial livelihoods," Khalid Taha, a former employee, said in a statement to Bloomberg.
But many critics said the penalties didn't go far enough, considering that, as Matt Egan put it for CNN Money, "The scope of the scandal is shocking."
"This 'record breaking fine' is a rounding error compared to Wells Fargo's second quarter profits of $5.6 billion."
—Yves Smith, Naked Capitalism
"It sounds like a big number, but for a bank the size of Wells Fargo, it isn't really," David Vladeck, a Georgetown University law professor and former director of the Federal Trade Commission's Bureau of Consumer Protection, told Egan.
Indeed, wrote Yves Smith at Naked Capitalism:
This "record breaking fine" is a rounding error compared to Wells Fargo's second quarter profits of $5.6 billion. Not surprisingly, investors shrugged off the fines. The bank's stock traded up by 13 cents on Thursday, closing at $49.90. In other words, to the extent bank execs do "think again" before permitting fraud to take place on their watch, the lack of any impact on sacrosanct share prices and on the officials personally says they should see if they can get away with it, since the downside is inconsequential.
As analyst and commentator Josh Brown explained at his blog, Reformed Broker:
You guys know who pays the $185 million fine, right? Not the executives. The shareholders. That's you. Wells Fargo is America's most valuable bank by market cap at $250 billion. It's held by Vanguard, BlackRock, Fidelity and virtually every other fund company in existence, which means you are indirectly a shareholder if you have a 401(k). Lots of ordinary investors hold the common stock of Wells Fargo in their personal accounts outright. Many more own it in mutual funds or ETFs. You're paying. You.
Smith also took issue—as many did—with the "lack of punishment of executives in a fraud of this scale that extended over five years."
"Either they were in on it," Smith wrote of those at the top, "or somehow lower level employees cooked this up and were able to hide it from the top brass. The latter would represent a massive control failure. ... There is no way [Wells Fargo executives] can have it both ways. Either they were in on the ripoff or they were not even remotely on top of what was happening. But, in keeping with the half-hearted enforcement culture that has become normal in the U.S., the executives were allowed to get away with crooked conduct that unquestionably was their responsibility, whether by omission or commission."
Commentator Matt Stoller explored a similar argument in a series of tweets:
Either Wells management knew about this and they are crooks or they didn't and the institution is too big to manage.
— Matt Stoller (@matthewstoller) September 8, 2016
8. Now, to be clear, obviously the executives should be charged for this. It's negligence on a grand scale, at the very least.
— Matt Stoller (@matthewstoller) September 9, 2016
10. We have a political and commercial system that does not protect the property rights of the broad mass of people.
— Matt Stoller (@matthewstoller) September 9, 2016
"What other business in the world could defraud a couple million customers and not be in jail?" wondered Dennis Kelleher, president and chief executive of Better Markets, in an interview with Common Dreams.
Indeed, the news "raises the question yet again," Kelleher said, of whether massive financial institutions "have learned anything in the past 10 years."
While executives have largely been let off the hook, news outlets reported that Wells Fargo has fired—over the last five years—at least 5,300 employees who were involved in the scam. But that claim, too, is problematic, Smith explained:
[T]o add insult to injury, Wells is getting away with bogus accounting by stating it fired 5,300 employees as part of rooting out this misconduct. The wee problem with this claim? The terminations in question took place over five years. Yet the timelines presented in media reports suggest that the heat on Wells didn't get serious until 2015, when the Los Angeles City Attorney filed suit against the bank. The city would not have found it necessary to file a claim if Wells had been serious about rooting out the grifting as of then. But it is too easy for casual readers to miss the significance of this section from the Wall Street Journal’s report:
In detailing the widespread nature of the bank's alleged missteps, CFPB said Wells Fargo, has "terminated roughly 5,300 employees for engaging in improper sales practices." The bank, the nation's largest by market value, would not comment on the "levels of leadership" involved in the firings, but bank spokeswoman Mary Eshet said "both managers and team members were affected."
She said the firings should be seen in the context of the bank's size—it had 268,000 employees at the end of June—and that they happened over five years.
So the general public is supposed to take comfort that 98 percent of Wells Fargo's employees are not now acknowledged to be crooks? And if we are to believe the bank's claim that it's been addressing this, ahem, impropriety over the last five years? That means either the regulators had nothing to do with the terminations, or they are perversely giving Wells a break by letting them take full credit.
Meanwhile, Federal Reserve governor Daniel Tarullo said Friday that the latest scandal was evidence that bank behavior hasn't "changed enough" since the financial crisis.
MarketWatch reports that Tarullo "said he wanted regulators to hold individuals at bank responsible for inappropriate behavior rather than simply have firms pay fines. Even criminal prosecution of bank officers should be pursued 'in order to make the point that there is individual culpability'," he said.