Wells Fargo: Anatomy of a Scam

Colleen Beckerle

October 1, 2016

Principles of Microeconomics

Wells Fargo Banking Scandal

Wells Fargo Snapshot

Wells Fargo’s slogan is “Together We’ll Go Far”. Wells Fargo is the world’s second largest bank by market capitalization; third largest bank in the US by assets; $250 billion in holdings.  Wells Fargo employs 265,200 as of 2015.  6,385 employees have been terminated since 2008 as a result of Wells Fargo involvement in this banking scandal.  

The CEO of Wells Fargo is John Stumpf.  In 2008, Wells Fargo received $25 billion in banking bailout money from the US government and another $13.7 billion to remain safely capitalized.  His 2012 bonus was $22.90 million which is 473 times the median salary of a WFC employee.

WFC employees have been under extreme pressure from management since 2008 to achieve extraordinarily high sales levels. The Consumer Financial Protection Bureau (CFPB) has been investigating Wells Fargo and Company (WFC) for opening millions of unauthorized bank accounts. WFC and CFPB will not disclose the exact starting date of the investigation or how it came to light.  Recently, CFPB, the banking oversight division of the US government, has fined WFC $190 million for its activity in the scandal.

Unauthorized Sales Scandal

With such pressure from management to increase sales and meet extraordinarily high quotas, or face termination or demotion, employees allegedly resorted to opening fraudulent checking, credit and debit accounts.  Employees used money in the existing accounts to fund the new fake start-up accounts.  This often left customers without sufficient funds on which they paid additional fees to Wells Fargo.  

WFC is alleged to have illegally opened 1.5 million in deposit accounts in the name of existing customers although they did not authorize such accounts.  Another 565,000 credit cards were also issued to customers without their consent.  Debit cards were issued without customers consent and employees went so far as to create false Pin Numbers.  

Impact of the Scam

The $190 million fine will be divided with $100 million going to the CFPB; $35 million to the Office of Comptroller of the Currency; $50 million to the City and County of Los Angeles.  The remaining $5 million of the fine will be paid to customers as restitution.

John Stumpf, CEO will forfeit all outstanding unvested stock awards of about $41 million dollars.  He has also agreed to forfeit his salary during the investigation. As of this date a Congressional Sub-Committee investigating WFC has called for his resignation which he has refused to submit.  Carol Tolstedt, leader of the community banking unit, will forfeit unvested equity awards of around $19 million.  Neither Stumpf nor Tolstedt will be awarded an annual bonus for 2016.  

Lawsuits by Ex-Employees and Shareholders

Several groups of employees and shareholders have now filed suit in Los Angeles County Superior Court alleging that the banks pressure and illegal sales practices pushed employees to the “breaking point”.  Ex-employees who were demoted or terminated in the past ten years are asking for $2.6 billion in damages. Various WFC subsidiaries have already suffered losses of 2% to 2.4% as a loss of trust in WFC.

Illegal Foreclosures on Military Loans

Further damaging WFC’s public image is the illegal foreclosure of vehicles of 456 military servicemen while they were deployed in foreign war zones. WFC is the banking leader in foreclosure rates. CEO John Stumpf responded to Congress by saying, “In those instances where some service members did not receive the appropriate benefits and protections, we did not live up to our commitment and we apologize”. This apology did not sit well with Congress as Stumpf suffered a barrage of criticism from Congressional leaders. What Stumpf continued to describe as a “mistake” Representatives, Democrat and Republican, called “theft”, saying, “you should be in Jail!” In Stumpf’s repeated attempts to defend his company, he said that he “accepts full responsibility”, for his company. That gave Democratic Congressman from New York to tell Stumpf, “you should be fired!” Mr. Stumpf’s reply was, “I serve at the pleasure of the Board.”

A list of fines equaling more than $10 billion levied against WFC in the recent years includes:

• Penalties for subprime mortgage abuse
• Discriminating against African-Americans and Hispanic mortgage borrowers
• Foreclosure violations

Stumpf was asked if the fines were seen as simply a cost of doing business, which he denied. He indicated that WFC would eliminate the goal setting practices that cost almost 6,000 employees their jobs. He says he doesn’t think employees should be fired for missing quotas, but admitted that it has happened and WFC is looking into see how many and who had been affected.

WFC is also contacting individual customers to pay back any money they had been fined without authorization. Congressmen asked how many people in their own states had been affected. Stumpf responded with Texas, 149,857; Missouri, 1,191; Delaware, 4,255; and others.