Vitriol on Capitol Hill and an historic fine from a financial watchdog during an election cycle could be bad news for any other banks behaving badly.
The post-financial crisis era is over. Protests against the 1% are a distant memory to most. Leftist presidential hopeful Bernie Sanders did gain a passionate following in part by railing against bankers, but the world is spinning in a much different climate from what we saw during the last two election cycles.
That’s one reason that the fallout from the Wells Fargo scandal has some concerned. This controversy seems to be reverberating in a way that few Wall Street stories have in recent years.
Weeks after the world learned that 5,300 of the bank’s workers opened up two million sham bank and credit card accounts for customers — without their knowledge — the finger-waving turned to grandstanding on Capitol Hill.
Yesterday, Senator Elizabeth Warren (D-MA) showered Wells Fargo CEO John Stumpf with scorn during a congressional hearing. “You should resign,” said Warren. “You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission.”
The illicit operating behavior has been widely blamed on the pressure and incentives employees had to open more accounts. Warren scolded Stumpf for Wells Fargo’s culture, saying “you squeezed your employees to the breaking point so they would cheat customers.”
These are the type of memorable words, amid uncharacteristically easy-to-understand financial sector malfeasance, that are likely to resonate with the masses. Add in the $100 million USD fine levied against the company by the Consumer Financial Protection Bureau (CFPB) — its largest of all time — and it’s easy to imagine this Wells Fargo mess remaining on the radar throughout the rest of the election cycle.
After initially transferring blame to the rank-and-file employees who opened the accounts, Stumpf did begrudgingly accept some blame. “We never directed nor wanted our team members to provide products and services to our customers that they didn’t want,” he said at the hearing. “That said, I accept full responsibility for all unethical sales practices.”
It remains to be seen if he will take Warren’s advice and step down. Wells Fargo already canned Chief Risk Officer Claudia Russ Anderson, and the financial damage is mounting. On top of the $100 million USD fine from CFPB, the bank will pay $85 million to other agencies plus customer refunds. Then there is the reputation loss that could be even greater than that vast sum and, the real pain, a $25 billion USD drop in market capitalization since the scandal broke.
Even if this is something of an outlier case of incentives gone too far, others are now thinking about how to avoid a fate that cost Wells Fargo so much. Payment practices are now under review at other banks. Capitalization scrutiny, like that facing Deutsche Bank, could get more profile. Lawmakers may start caring when taxpayer — and constituent — money ends up in bank profit statements. CFPB sounds prepared to follow up this record fine by making examples of any other banks behaving badly.
One benefit, on the other hand, could be innovation. Companies will now want better safeguards to protect themselves from similar embarrassment. American Banker is asking if technology could have prevented this from ever happening in the first place.
“Systems that are used to detect fraudulent account openings and transactions can be adapted to detect internal shenanigans as well,” David Mooney of Alliant Credit Union told the publication. “This is a particularly good application for artificial intelligence and intelligent machines, which can scan large amounts of public and internal data and identify patterns.”
This may all blow over. LIBOR, like so many financial sector scandals, largely did. Legislators can move on quickly, especially during elections.
But the timing and vitriol surrounding Wells Fargo’s transgressions means that there could be collateral damage for others in the financial services industry. “We put industry clearly on notice,” said CFPB head Richard Cordray on CNBC. “We will be looking for these types of problems.”
Photo Credit: DonkeyHotey