Wells Fargo executives know that everyone hates them. In the last two years, the bank has launched three separate marketing campaigns hoping to clean up its public image, only to see each effort thwarted by fresh, catastrophic scandals ― like wrongly repossessing 27,000 cars and foreclosing on 400 families for no reason.
The bank’s latest quarterly filing with the Securities and Exchange Commission dedicates more than 2,000 words to “Additional Efforts To Rebuild Trust,” listing “automobile lending,” “mortgage interest rate lock extensions,” “consumer deposit account freezing/closing,” “certain activities within wealth and investment management,” “foreign exchange business,” “fiduciary and custody account fee calculations,” “mortgage loan modifications,” and “add-on products” as areas where the company may have been improperly seizing large sums of money that belong to other people. That section is followed by over 4,250 words on major legal liabilities the bank is currently facing.
Wells Fargo is even scamming rich people now, according to recent Yahoo Finance reporting, by intentionally steering high-net-worth clients into unnecessary products with high fees.
To any reasonable person, Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet. The bank has reported a combined $39.1 billion in profit since the final quarter of 2016. The Federal Reserve recently approved a 10 percent increase in the quarterly dividend the bank pays to its shareholders, allowing those profits to be converted into straight cash for its owners.
Wells Fargo’s very existence, not to mention its continued profitability, is an indictment of two decades of embarrassing regulatory oversight from four separate administrations. Ever since the 2008 financial crisis, the top minds in global finance have wondered whether the biggest U.S. banks are strong enough to withstand the next crash. But Wells Fargo reveals a different problem: a chronically dysfunctional, predatory bank that is perfectly profitable. It’s not only “too big to fail,” but too big to fix.
“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change,” said University of Georgia law professor Mehrsa Baradaran. “Wells Fargo is one of those firms that has a toxic culture.”
Wells Fargo is a rolling disaster ― a ripoff, wrapped in a swindle, inside a bank. And yet to a Wall Street investor, Wells Fargo looks like a pretty good bet.
If Wells Fargo were liquidated right now, its shareholders would reap about $211 billion, according to the bank’s latest official accounting. But the company’s stock is currently valued at around $281 billion ― indicating that the stock market believes there is something special about Wells Fargo that adds $70 billion in value to all the crap the company actually owns.
The stock market is wrong all the time, but it’s useful to consider why investors think Wells Fargo is so valuable. Since we know the bank is managed very badly ― federal agencies have sanctioned it for misconduct 43 different times in the years following the 2008 financial crisis ― it is hard to conclude that Wall Street’s enthusiasm has much to do with the skill of Wells Fargo’s management.
Instead, the bank’s magic $70 billion is an expression of its political power, derived from its sheer size. Regulators might focus on fixing individual problems when they arise, but the bank, insulated for decades from serious penalties like prosecution or dissolution, has no pressing incentive to head them off.
“Consequences matter,” said Vermont Law School professor Jennifer Taub. “Until law enforcement holds gilded grifters accountable, they will continue to operate companies ... unlawfully.”
Most histories of the 2008 financial crisis focus on elements of the mess that were new, complex or strange ― the explosive growth in exotic products like subprime mortgages and credit default swaps, the spread of risk through new channels of “interconnectivity.” But much of the crisis was the result of something much simpler: There were just way, way too many bank mergers at the turn of the millennium. Several of them became the bank we call Wells Fargo today.
Back in 1996, Wells Fargo was a California-only operation with about $50 billion in assets that wanted to grow. It made a bid for the similarly-sized First Interstate Bank and ended up acquiring the firm in a hostile takeover. The result was an almost immediate debacle. As The Wall Street Journal recounted in 1997:
Wells Fargo lost customers’ deposits, bounced good checks, incorrectly withdrew money from some accounts and added funds to others. Angry customer complaints went unanswered at understaffed branches and telephone support centers.
By 1998, Wells Fargo was in so much trouble it was acquired by a Minneapolis-based bank called Norwest, which assumed the California bank’s name. The stagecoach logo was good, and by taking on the faltering bank’s brand, Norwest could claim a legacy going back to 1852 ― a nice marketing asset. The following year, the combined bank went on an acquisition bender before Wells Fargo and Norwest had even finished integrating their systems, picking up 13 smaller firms in Texas, Pennsylvania, Wyoming, New York, Colorado and Minnesota. Suddenly the bank had $212 billion in assets ― four times the size of the California namesake firm that had botched its big merger three years earlier.
Norwest had been managed by hard-charging CEO Dick Kovacevich, who urged his employees to “cross-sell” as many financial products to its customers as possible. In 1997, before the bank had set its sights on Wells, Kovacevich pushed ahead with an initiative he called ”Going for Gr-Eight,” in which every client would end up with at least eight different Norwest products: a bank account, credit card, insurance, mortgage ― whatever, just get to eight, whether this actually meets a customer’s needs or not. When Kovacevich stepped down in 2007, his deputy, John Stumpf, took over and tweaked the line, living by the motto, ”eight is great.” This may help explain why we later found the bank embroiled in a scandal over several million fake accounts.
But in the meantime, the bank kept growing, buying back big blocks of its own stock and paying out huge dividends to its shareholders. In the two years after the Norwest merger, Wells Fargo announced the acquisition of 41 separate companies. By 2003, the list of takeovers included 22 banks, 17 insurance brokerages, 12 consumer finance companies, 10 “specialized” lenders, four securities brokers, three trust companies, three commercial real estate firms and a mass of loan portfolios and servicing contracts. By 2008, Wells Fargo had had $521 billion in total assets ― 10 times its size a dozen years earlier ― and was raking in over $8 billion a year in profits.
None of this would have been possible without some help from the government. Until 1994, it was illegal for banks to expand across state lines, and when the Clinton administration repealed the Glass-Steagall Act in 1999, they were also permitted to merge with insurance companies and investment banks. Advocates of deregulation argued it would help make banks more stable; if one line of business faltered, the bank would have alternate revenue streams to keep it afloat. The idea that one toxic line of business might poison others ― or that dozens of different fiefdoms would prove impossible for management to corral ― did not seem important. Wells Fargo kept expanding.
But it never really got its basic business in order. There were signs that something was going terribly awry beneath the bank’s profitable veneer. In 2005, a securities regulator fined Wells Fargo $3 million for ripping off its mutual fund clients. In 2007, it paid $12.8 million to settle a lawsuit alleging the bank had stiffed its employees for overtime pay. In January 2008, eight months before the failure of Lehman Brothers, the City of Baltimore filed a civil rights lawsuit against Wells Fargo alleging that the bank had been steering borrowers of color into predatory subprime mortgages. A year later, the state of Illinois filed a similar lawsuit.
“At one point Wells Fargo developed this culture of sell the product, customer be damned,” said Baradaran. “And they are not going to change that model because they are making plenty of money despite, maybe even because of, these violations.”
The crash revealed that Wells Fargo had been up to the same nasty business that the rest of the banking industry had been ― selling toxic mortgages and toxic securities, misleading investors and the federal government alike. The bank was still paying out settlements for pre-crash abuse as late as 2016.
Wells Fargo survived the recession with a series of gifts from the federal government ― the Congressional bailout and a lot of help from the Fed. But it also picked up the remains of another massive, faltering bank: Wachovia, in the fall of 2008.
Wachovia was itself another big bank merger horror story. It had acquired Golden West in 2006, a lender that specialized in non-traditional mortgages. Golden West was far from perfect, but it had been careful enough with its customers to survive the savings and loan crisis of the late 1980s and early 1990s. Its signature products, however, were tailor-made for foreclosures if home prices declined. They allowed people to pay low rates early in the life of the loan, with payments ratcheting higher as the years passed. If a borrower couldn’t afford the higher payment and didn’t have the equity to refinance, they were doomed. When Wachovia pumped these loans through its existing bank network, the result was a mortgage meltdown that destroyed the bank.
The Wachovia deal transformed Wells Fargo into a $1.2 trillion behemoth. And through sheer salesmanship willpower, the combined institution expanded by another 50 percent over the next six years. By the time the fake account scandal broke, the company had nearly $1.9 trillion in assets. In 20 years, it had grown by roughly 3,700 percent.
“We tend to think of these big firms as stocks and portfolios, but there are deep systemic cultures that develop over time and are really hard to change. Wells Fargo is one of those firms that has a toxic culture. University of Georgia law professor Mehrsa Baradaran.
The truth is, Wells Fargo has never been able to manage its bulk ― not in 1996, not in 2006, not today. The market is meting out some punishment for its recent misconduct, or Wells Fargo wouldn’t be launching so many advertising campaigns. But much of the company’s consumer business doesn’t actually face consumers ― Wells Fargo just buys up loans and contracts from other firms and processes them, collecting a fee for its service. Plenty of Wells Fargo’s customers don’t really have a say in whether they want to work with the bank or not. Regulatory fines generate headlines ― most notably a $1 billion sanction for that mass automobile repossession screw-up ― but are too small to serve as much more than a cost of doing business.
“Over the past two years, we have made significant progress. We have completed many comprehensive third-party reviews, made fundamental changes to retail sales practices, and received final approval on a class-action settlement concerning retail sales practices,” said Wells Fargo spokeswoman Cynthia Sugiyama.
Among the changes the company says it has enacted are increased pay for entry-level employees, expanded public disclosures and an overhaul for the way it rewards performance of its retail bankers, focusing on “customer experience” rather than numerical sales targets.
Earlier this year, outgoing Fed Chair Janet Yellen took the strongest action against the bank to date, forcing it to replace four of its 12 board members. But no whittling at the edges is going to change Wells Fargo. Though Stumpf was forced out of office in the uproar over the fake accounts, his replacement, Timothy Sloan, is a co-designer of this monster. He made $60.4 million serving in various executive capacities for the bank between 2011 and 2016, according to SEC filings, and certainly doesn’t seem interested in radically overhauling an extraordinarily lucrative business.
Wells Fargo may not even be the worst big bank out there. Citigroup, another merger monstrosity, is so poorly pieced together that today, Wall Street investors don’t even believe the bank is worth its liquidation price. JPMorgan Chase has notched 52 fines and settlements since the crash. Goldman Sachs has 16, three of them this year.
In a revealing interview with New York Magazine earlier this month, former FDIC Chair Sheila Bair said she wished regulators had broken up a bank after the crisis, probably Citigroup. Forcing at least one institution to pay the ultimate corporate price would have put pressure on other major firms to clean up their acts.
Both the Bush and Obama administrations rejected Bair’s plan. And so today, the American banking system ― rescued by taxpayers a decade ago to protect the economy ― has transformed into a very large, very profitable criminal syndicate.