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Leaders should be held accountable for employees’ bad actions, senator says
If Sen. Elizabeth Warren, D-Mass., had her way, Wells Fargo Chairman and CEO John Stumpf—and not the fired 5,300 employees who scrambled to meet impossibly aggressive sales quotas by setting up phony accounts—would be out of a job.
Republicans and Democrats on the Senate Committee on Banking, Housing and Urban Affairs uniformly criticized Stumpf at a Sept. 20 hearing about the 2 million unauthorized accounts that the employees created over at least the past five years.
The bank knew about the problem as far back as 2011 and now is going to investigate whether it started in 2009 or 2010, Stumpf said. In addition to apologizing and promising that the bank would make things right, he noted that Wells Fargo was doing away with product sales goals as of Jan. 1, 2017.
Pressure to Cross-Sell
Prior to this decision, Wells Fargo employees were pushed to cross-sell accounts to existing customers so that the clients would have at least eight accounts each. And why eight? Because "eight rhymes with great," the bank's 2010 annual report stated. The industry average was just three accounts per customer.
During her questioning of Stumpf, Warren said she believes the bank pushed its employees to cross-sell not to provide customers with what they needed, but instead to boost Wells Fargo's stock price.
Cross-selling is about deepening relationships with customers, Stumpf countered.
Warren interrupted him to note that during 12 earnings calls, Stumpf personally pitched investors about why the bank was a great investment, citing cross-selling as one of the main reasons why investors should buy more stock. In 2012, the account-customer ratio was a record 5.98 products per household, rising to 6.1 products per household in 2013 and 6.17 in 2014. The ratio went up and up, and it didn't matter if the customers used the accounts or not.
"And guess what?" Warren asked. "Wall Street loved it." Top analysts recommended buying Wells Fargo stock because of the strong cross-selling record.
"It was good for you personally," she said to Stumpf, noting that he gained more than $200 million in share value "thanks in part to those cross-sell numbers."
Were Employees Taken Advantage Of?
"Here's what really gets me about this," Warren said: If a teller took a handful of $20 bills out of the cash drawer, he or she probably would face criminal charges for theft and could end up in prison. But the bank pressured employees, she said, so they'd cheat customers and Stumpf could drive up the value of his stock.
"And when it all blew up, you kept your job, you kept your multimillion-dollar bonuses and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich," she said.
Warren noted that not a single member of Wells Fargo's senior leadership had been fired because of the creation of the phony accounts. "You should resign. You should give back the money 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."
Warren called for tougher laws that would hold Wall Street executives accountable, as well as tougher enforcement of existing laws.
Sen. Jon Tester, D-Mont., asked what Wells Fargo would do if unpaid fees on the phony accounts had adversely affected customers' credit ratings. If the bank charged an interest rate that was one-half a percent higher because of a customer's unfairly worse credit score, then the customer could pay thousands of extra dollars over the course of just one mortgage, he noted. Tester asked if Wells Fargo would find and make whole such customers.
"We're working on that," Stumpf said.
Lessons of the Financial Crisis
Ranking Member Sen. Sherrod Brown, D-Ohio, said he was surprised banks hadn't learned the lessons of the financial crisis of 2008 yet. He said banks need to:
Republicans criticized Stumpf as well.
If problems existed as early as 2011 or even before then, why did it take an L.A. Times reporter in 2013 to begin to uncover the extent of the problem? asked Sen. Richard Shelby, R-Ala., chairman of the committee. "Isn't banking built on trust? What's happened to the banking system?"
Stumpf replied that trust is essential in banking and that Wells Fargo had some work to do with restoring its trust with its customers.
Sen. Bob Corker, R-Tenn., asked if the company was going to try to clawback some of the compensation to Carrie Tolstedt, former head of Wells Fargo's consumer banking unit. She reportedly retired recently with a little under $100 million in stocks and options.
That share value will be difficult to clawback, reports CNBC. Stumpf replied that he is not involved in such compensation decisions.
Sen. Patrick Toomey, R- Pa., asked whether, in light of the amount of time the "fraud," as he put it, was going on, there was some directive by senior management to set up the phony accounts.
Wells Fargo did fire managers, managers' managers and an area president over the five years that the extent of the phony accounts came to light, according to Stumpf. Now a customer's signature is required to open an account, and within the hour, the customer will receive an e-mail that confirms the opening of the account, he added.
Stumpf asserted that the phony accounts were "not representative of Wells Fargo as an institution," noting that less than 1 percent of its workforce set up such accounts. He also stated that Wells Fargo employs 1 in 600 working Americans. But he added, "We should have done more sooner."
Sen. Heidi Heitkamp, D-N.D., retorted, "You still are not acting fast enough," and called for Wells Fargo to repair customers' credit ratings.
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