Robbing The Stage

Media Grossly Downplaying the Depths of the Wells Fargo Scandal

The Wells Fargo Scandal Was By Design
by Ian Welsh
9/20/16

This wasn’t about revenue. It was about being able to say “we opened so many new accounts and credit cards” to Wall Street. Much of executive compensation is based on stock options and stock prices go up when you “beat expectations” and report good news. New accounts and credit cards aren’t expected to generate a lot of money immediately, but they are leading indicators of future earnings. By beating expectations on these numbers, Wells Fargo would have a higher stock price than if they didn’t, and everyone who was paid in stock options in the company (aka. every executive, likely) would receive more money for those options.

Carrie Tolstedt is being treated well because she did what she was supposed to. The 185 million dollar settlement is worth more than the accounts were to Wells Fargo BUT the executives running Wells Fargo got a lot of personal money out of it and were not punished. Some of them, those Tolstedt reported to, may well have “earned” promotions from it as well, based on meeting or exceeding sales goals.

Everyone who makes decisions at Wells Fargo, in other words, benefited from the scam. The only people punished were junior employees who, while complicit, I guarantee were doing what management wanted them to do, and who would have been fired before this if they hadn’t been willing to play along.

Financial fraud of this sort always follows this pattern: executives get rich doing it, the company takes a hit but not the executives, and the executives have no reason not to go on to their next fraud or even go back to what they were doing (sub prime loans are a thing again, and we’ll find out many of them were based on fraud, again.)

The only way this sort of thing will stop is if senior management, the CEO and board members start being charged with crimes. Use RICO statutes to say it was organized crime (it was), and take their money. Assign them public defenders. Even if they don’t go to jail (and if they do, it should be to nasty maximum security penitentiaries) they will lose a decade of their life defending the case, and will serve as a genuine deterrent to other financial fraudsters.

Fines for the company are NOT a disincentive. In this case the fine is more than the company made, while in other cases it has been much less, but it doesn’t matter: the executives got their money and they make the decisions. The company is a fictional person, not a real person, it does not make decisions.

Frankly, $185 Million is a rounding error for a $5.6 Billion company like Wells Fargo and morally 2 Million accounts and 5,300 employees is not “a few bad apples” but corporate policy, however the sin for which Wells Fargo Chairman and CEO John Stumpf will probably lose his job and might go to jail is Investor Fraud. As Ian points out “New accounts and credit cards aren’t expected to generate a lot of money immediately, but they are leading indicators of future earnings.” These numbers were represented as true to potential owners in Wells Fargo (shareholders) and their accuracy attested to on legally binding fillings signed by their corporate officers under civil and criminal penalties if false.

Senator presses Stumpf on Wells Fargo’s duty to disclose
By Francine McKenna, MarketWatch
Sept 20, 2016 12:07 p.m. ET

Senator Pat Toomey, the Republican from Pennsylvania pressed Stumpf on whether the bank should have disclosed the potential losses from litigation surrounding the unauthorized account opening issues to the Securities and Exchange Commission much sooner than Sept. 8.
…
Regulators settled with the bank for $185 million fine on Sept. 8, but Stumpf testified management and the board was informed of the issues in 2014. The Los Angeles City Attorney filed a lawsuit against the bank in 2015 after Los Angeles Times first published reports of the problems in 2013.
…
Generally Accepted Accounting Principles, the standards public companies are required by law to use for reporting and disclosure, mandate disclosure of a potential loss from a regulatory investigation, such as the $185 million Wells Fargo agreed to pay regulators, when it is reasonably possible. The amount of the loss must be accrued and recorded on the books when the loss is both probable and reasonably estimable.

In its statement to customers on Sept. 8, Wells Fargo said that it had fully accrued for the $185 million penalty at the end of the second quarter, but its results filed with the SEC do not disclose this potential fine.

Stumpf has promised restitution to account holders for fees and penalties assessed by the Bank but has given no indication that he will attempt to make good the losses of his owners, the people he supposedly works for and has a fiduciary duty to.