How to Get Justice After the Wells Fargo Scandal

Wells Fargo's abuse of its customers -- its employees opened some 2 million accounts and credit cards for depositors who may not have wanted them -- has sparked deserved outrage. Sen. Elizabeth Warren (D.-Mass.) charged Wells Fargo chair and chief executive John Stumpf with "gutless leadership," calling on him to resign and give back the pay he pocketed, and called on the Justice Department to launch a criminal prosecution. Rep. Maxine Waters (Calif.), the senior Democrat on the House Financial Services Committee said Wells Fargo had committed "the most egregious fraud we've seen since the foreclosure crisis." Criticism, however, is easy. The question is whether there will be real consequences and real reforms coming out of the scandal.

The Obama administration's record to date isn't reassuring. Big banks have been fined more than $110 billion for what the FBI called the "epidemic of fraud" in the mortgage wilding that blew up the economy. But the banks have ended up bigger and more concentrated than ever. And only one top banker has been prosecuted or forced to disgorge his or her ill-gotten wealth. With no personal accountability, the scams are likely to be replicated in different forms, as the Wells Fargo scandal shows.

The time for a crackdown is long overdue. Voters are disgusted, and as the bipartisan outrage at Wells Fargo demonstrated, politicians are getting the message. Stumpf tried to blame the frauds on rogue employees, firing 5,300 over the past few years. But the abuses were too pervasive for that to pass the smell test.

The Consumer Financial Protection Bureau fined Wells Fargo $185 million, but that slap on the wrist is barely 3 percent of the bank's second-quarter profits. Wells Fargo has paid more than $10 billion in fines over the past several years, but these begin to seem, as Rep. Jeb Hensarling (R.-Tex.), chair of the House Financial Services Committee suggested, "simply the cost of doing business."

Under pressure from regulators, the passive Wells Fargo board -- which Stumpf chairs -- clawed back some $60 million in bonus pay from him and the head of consumer accounts, the retiring Carrie Tolstedt. The California state treasurer, who is running for governor, suspended "business relations" with Wells Fargo for a year, calling on Stumpf to resign. Illinois followed suit, with others lining up. Stumpf will surely retire as soon as the dust settles.

But much more is needed for real deterrence. First and foremost are criminal investigations and prosecutions. What Wells Fargo did is a classic case of what retired bank regulator William K. Black calls "control fraud." Executives set up insane quotas for "cross-selling," threatening to fire employees who did not meet them. The result was widespread cheating. Whistleblowers were ignored and sometimes dismissed. Stumpf admits to knowing about the sham accounts and federal investigations but didn't include the information in SEC filings, a clear case of defrauding investors. This will be the final chance for President Obama's hapless Justice Department and compromised SEC to demonstrate that they possess the independence needed to police the banks.

Second, Waters surely had it right when she said, "I have come to the conclusion that Wells Fargo should be broken up. It's too big to manage." Wells Fargo ranks as the third-largest U.S. bank in assets and largest in employees. It is a serial offender. As Stumpf's clueless testimony makes clear, it is too big to manage, too big to fail and thus too big to exist. The Dodd-Frank reforms give federal regulators the power to break up banks that pose a systemic risk. Wells Fargo may not pose the biggest risk or be the worst offender, but it is a good place to start.

Third, customers should start voting with their accounts, moving them out of Wall Street banks and into smaller and better-managed credit unions and community banks. Bloomberg reports that since the financial crisis, credit unions have grown steadily, with millennials flocking to them. Customers could also pick progressive banks such as the Amalgamated Bank. Started by the Ladies Garment Workers Union in 1923, Amalgamated champions responsible banking, and is now campaigning to raise the minimum wage. Not surprisingly, it often finds itself at odds with the bank lobby in Washington skirmishes.

Finally, Wells Fargo's abuse of its customers should give a boost to postal banking, a sensible reform championed by Warren, Sen. Bernie Sanders (I-Vt.) and now part of the Democratic Party's 2016 platform. The Federal Reserve estimates about half of the U.S. population can't cover a shortfall of $400 due to an unexpected expense without borrowing the money. More than one in four Americans -- 88 million -- are either unbanked or underbanked -- meaning that they rely on alternative financial services such as payday lenders and pawn brokers that gouge routinely. As Mehrsa Baradaran reported in the Nation, the unbanked pay a significant portion of their paychecks -- around 10 percent -- to use and move their money. This is more than the average low-income family spends on food.