Wells Fargo, till recently, had earned itself a good reputation as a financial institution mainly due to the fact that it escaped from the Recession largely unscathed. That has come under huge scrutiny with the latest scandal that has hit the bank. It has been accused of creating 2 million fake account in the form of bank account and credit cards in the name of existing customers. This was mainly done to increase the commissions that the employees would earn for bringing in new accounts and meeting targets.
It has been estimated that a total of around 5900 employees have been fired from Wells Fargo in the past few years over this fraud. It has also been fined more than $185 million. More than the fines, it is the loss of reputation and trust that the management should be worried about. Also, a fraud of such massive scale happening over a relatively long period of time should have required the involvement of some senior people in the management and this would add further indignation to the public and the customers who believe that they have been used by the employees to generate handsome commissions for themselves. It also places serious doubts over the risk management practices that were being followed in the bank. Critics also blame the large size of the bank and the different levels of employees and they believe that the number of levels was too much and too big for them to manage the lower level employees effectively. The fraud was stretched to the extent of charging customers for services that they never took and their new accounts being funded with their other accounts.
At the center of the storm is the leader of the unit in which this fraud was committed, Carrie Tolstedt, who is also the Executive VP at Wells Fargo. The level of her involvement and her knowledge of the fraud and the timelines aren’t very clear as yet but all said, she walks away with a cool settlement for $125 million when she formally retires at the end of the year. This is a settlement that she has earned over the years and has been a part of her package but the timing and the ethics behind this large settlement when the bank and her division, in particular, has been accused of fraud hasn’t gone down well with the critics.
This may or may not be a topic of discussion when the Senator Elizabeth Warren grills the CEO of Wells Fargo in the Senate hearing that is scheduled for September 20. Like many critics, Mrs Warren is also not convinced that this fraud could have happened without the notice of some senior employees of Wells Fargo and the CEO would have some tough questions to answer with regard to the timing, the risk management procedures that were followed etc. More skeletons could tumble out of the closet when the hearing happens and it could give an insight into the working of the behemoth bank and how safe it is for the customers. It could affect the markets as a whole and will surely affect the banking stocks in the US.
One of the persons hard hit by this fraud is the biggest investor that the world has ever known, Warren Buffett who owns a large number of shares in Wells Fargo. The surfacing of this fraud has led to the drop in the share price of the bank and this coupled with the general loss in the stock indexes has caused a loss of around $1.4 billion for the worlds richest investor. The drop was reflected in the shares of his holding company as well, Berkshire Hathaway Inc. This underlines the importance of risk management for large and small investors alike. If an investor of the acumen and size of Buffett could get it wrong, it just shows that anyone else could also get it wrong. But the fact that Buffett has seen and survived through several such falls just shows how good his risk management skills are and there lies a lesson for every investor.
The question is - What could have Wells Fargo done better with regards to its Risk Management to prevent such issue? Your comments are highly appreciated.
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Comments
I respectfully and profoundly disagree with the "Question" posed to answer. The "Issue" should be "the system versus the individual". The "question" posed by the author of this article blames the "individual (a few bad apples) when in fact is the other way around, that is, is the "system" that is, the capitalist system the issue to be address that triggers "undesirable behavior".
This is not a typical corporate behavior. It is embedded in the culture of corporations more in the service industry rather than in manufacturing. We all think and/or led to believe that we learnt lessons from 2007/08 infamous financial crisis. Those lessons were taught by same professionals who knew very well how Countrywide and Washington Mutual were the original geniuses. It is not wise on my part to ask where those Compliance Officers were, internal auditors were hiding. How come regulators including FDIC officials were unaware of these fraudulent activities were swept under carpet? Creating 2 million fake accounts could not have been done in ONE day. Forget about reputational risks, “C Suiters” always find some pendejos (a******s) to cover their actions and fly away with golden parachutes. Is this a wake-up call? No, this type of corporate behavior is inherent. As Preet Bahara made it clear, it is not easy to go after wrong doers. Consider application of Sally Yates’s memorandum, even though it took over 10 years to become a reality, to financial sector too, not just for FCPA infractions.
Subash Murray, FCA, Dip MS, CFE, LPI consilium@back2bizbasix.com, www.back2bizbasix.com