The latest financial scandal, courtesy of Wells Fargo, brings out the standard commentary, courtesy of Kerith Strano Taylor. Her conclusions about the fraud, the Consumer Financial Protection Bureau and the need for long-term thinking by Congress merit a reply.
Let’s start with her first claim: “The fraud could have been happening before 2011 but the Consumer Protection Financial Bureau — the entity that discovered and levied these civil penalties — did not exist before then.” Although I can’t be sure, the sentence seems to imply that the CFPB discovered the fraud (presumably it didn’t discover the penalties). If that is her assertion, it’s wrong. The Office of the Comptroller of the Currency learned of the problems in 2012; the Los Angeles Times first wrote about the issues in December 2013. And apparently, one way the L.A. Times was tipped off was from a suit filed by a Wells Fargo customer in September 2013. Three years later, we get a consent decree. So much for astute government regulators.
Strano Taylor’s figures about the fraud are accurate, but she doesn’t seem to understand their implication. Roughly 2,100,000 fake or unwanted accounts and credit cards were created by more than 5,000 customer representatives. But only about 5 percent of the accounts generated any fees, the total of which amounted to slightly more than $1 per account or about $25 per fee generating account. Plainly, the intent wasn’t to defraud customers; rather, the intent was to game the sales incentive system that Wells Fargo had established.
This conclusion is reinforced by the costs to Wells Fargo of the fraud. We can start with the restitution to customers of at least $2 million. Add the $185 million in fines just paid. In addition, Wells Fargo’s stock price has declined by roughly 8 percent in the past few weeks, which implies shareholders have lost more than $20 billion in market value. Multiple class action suits are certainly being planned, which could easily result in millions of dollars of damages. The bank has fired about 5,300 employees who committed the fraud, thereby incurring millions of dollars to hire and train new employees. It should be clear to Strano Taylor that no one in senior management could have wanted these outcomes. Indeed, it should be clear that there isn’t a single party that derived substantial benefits from the fraud. The cause of the fraud is more stupidity than cupidity. And, to be clear, stupidity doesn’t excuse the fraudulent behavior at Wells Fargo, but it should make us ask whether further regulation will solve such problems.
Strano Taylor uses a golf analogy to criticize the members of Congress who voted against Dodd-Frank, claiming they decided to play “putt-putt government.” Instead, she wants us to elect members of Congress who can “play the long game.” As a strategy for who to elect, this is completely vacuous. What does it mean to say that Congress is “putting” by seeking to restrict the CFPB? And why is supporting the CFPB “playing the long game?” A sensible debate would revolve around the costs and benefits of the CFPB, not golf analogies.
If Strano Taylor insists on golf analogies, she might want to watch the greatest golf movie ever made: “Caddyshack.” Anyone who has seen “Caddyshack” — and if you haven’t, you should — knows that the hero, Danny Noonan, wins the tournament on a putt while the blowhard Judge Smails slices into the rough. Politicians (and wannabe politicians) are more like Judge Smails than Danny Noonan. Or even worse, they might be like Carl the greenskeeper.
Dennis Sheehan is the Louis and Virginia Benzak professor of finance at the Penn State Smeal College of Business. The views expressed are his own.