Fallout From Wells Fargo
Scandal Could Last Years

| published October 13, 2016 |

By Earl Perkins, Thursday Review features editor

Wells Fargo's expanding problems may have a ripple effect which will cost billions and last for years to come.

Illinois State Treasurer Michael Frerichs suspended $30 billion in state investment activity with Wells Fargo last week, possibly igniting a financial backlash and sending a message that the general populace is tired of getting financially abused and raped by yet another major corporation.

The world's second largest bank by market capitalization and third largest in the United States by assets, the San Francisco-based international and financial services holding company will almost certainly bounce back from this crisis. However, Wells Fargo was compelled by the federal government to repay $25 billion it received during the great financial crisis, selling off $12.25 billion in stock to help satisfy the feds in 2009, according to the Associated Press, the New York Times and CBS News.

A massive chorus of outrage has descended upon the once-venerable Wells Fargo, now culminating in a scandal which saw thousands of bank employees open millions of phony credit card accounts to meet obviously unattainable sales goals—short of blatantly breaking laws. Top-level managers who pocketed massive bonuses for orchestrating the scheme disingenuously blamed the fiasco on underlings, summarily firing 5,300 over the past several years. The long-term scheme to generate fake accounts has adversely affected the credit of numerous depositors, causing many to pay higher interest rates on loans, and translating to incredible financial damage stretched across several decades into the future.

The official punishment by state officials in Illinois—only one week after California Treasurer John Chiang rolled out a similar set of measures in the Golden State—may be little more than window dressing on an institution that sees nearly $1 trillion annually in banking activities. Although Frerichs claims the bank could lose tens of millions, a Wells Fargo spokesman said the cost would be far less, and since the punishment is only scheduled to last for one year, it expects to rebound quickly.

"Wells Fargo is a big financial player in Illinois, and I hope to send the message that their unscrupulous practices are not welcome and will not be tolerated," said Frerichs, a Democrat, at a news conference in Chicago last week.

Following California’s measures—steps which included barring the San Francisco-based Wells Fargo from handling any state loans, denying it access to municipal bond activity, and raking it from state employee investment accounts—Illinois also temporarily disassociated itself from the banking giant. More states and some major cities could follow suit. The company had little choice but to consent to such sweeping punishments after the recent release of a federal consent order that claims bank employees opened approximately 2 million deposit and online accounts, along with credit and debit cards, without customers' knowledge.

The missteps occurred in the firm's retail bank, while its Government and Institutional Banking division has "diligently and professionally" worked with Illinois since 1970, and the "millions of dollars" Frerichs estimated the action would cost Wells Fargo, would actually be closer to $50,000, according to Wells Fargo spokesman Gabriel Boehmer.

"We are very sorry and take full responsibility for the incidents in our retail bank," Boehmer said in a written statement. "We have already taken important steps, and will continue to do so, to address these issues and rebuild the state's trust."

Frerichs noted that Illinois led a lawsuit four years ago that caused Wells Fargo to pay $175 million, settling allegations that its independent brokers racially discriminated against 3,000 mortgage borrowers. His office is presently carrying out an extensive audit which could reveal the fake accounts interfered with unclaimed assets, which would, in return, trigger the return of those funds to the original owner's state within five years, thus allowing distribution to heirs. Thus the progression of the audit already reveals hidden complexities and fallout of the scandal, and the scores of ways all those phony credit card accounts will impact Americans for years—even stymieing, some market analysts worry, an economy still not fully recovered from the Great Recession.

The storm will also have an impact on millions of IRAs, 401ks and retirement accounts, and will skew investments for years. Along with the other elements in the punishments, California officials announced last month that its $75 billion portfolio would not be tapped by Wells Fargo for at least one year while the bank sits in the penalty box.

"Wells Fargo is just the most recent example of the craven abuses that can be perpetrated when a financial institution comes to serve itself rather than its customers," Chiang said.

Scrutiny of Wells Fargo could be just the start: California bank regulators are now actively analyzing the sales practices of other banks after hints that Wells Fargo may be one of only a dozen major banks whose sales pressures spawned unethical processes and the creation of fraudulent accounts. Some banking analysts suggest that even a handful of former Wells Fargo employees—after having migrated to a competitor—could have shown their new bank colleagues how such schemes worked.

But the long term fallout has still unknowable qualities and dimensions, and continues to ripple into other areas.

Recent revelations show billionaire financier Warren Buffet is also more than mildly irritated with the company. His Berkshire Hathaway conglomerate holding company has taken a $3.1 billion hit on its Fargo holdings since September 8 when its scandal intensified, according to data from S&P Global Market Intelligence. That's when the Consumer Financial Protection Bureau accused the bank of creating more than two million phony customer accounts and when the banks stock first got slammed in the markets.

Berkshire Hathaway's losses on Fargo stock have hit $5.4 billion so far this year, double the damage Buffet has suffered on his next 10 worst investments in public U.S. companies combined, which almost single-handedly wipes out his top-performing $5 billion gain on Kraft Heinz. This is a man who has more than just the ear of officials who decide what the government will do before laws are formed.

Wells Fargo's largest stockholder is Hathaway, which holds 10 percent of all outstanding stock. Which, I might add, have fallen almost 20 percent this year, with 12 percent of that loss since its settlement with the CFPB.

And it's widely known that Wells Fargo had extensive knowledge of these shady dealings for several years. It is inconsequential that Fargo CEO John Stumpf says he knew nothing concerning the shenanigans of his underlings. He purposely insulated himself from those actions by creating several layers of administrators, giving him probable deniability concerning knowledge of the corrupt practices perpetrated on his behalf.

He has frequently claimed 2013 was the first time he heard about the fake accounts being created, but one whistleblower alerted the company years earlier, according to "CBS This Morning." Stumpf's managers fired her and thousands of others, hoping to cover up the indiscretions so top administrators would garner bonuses and continue lining their pockets for several more years.

“I started noticing what I thought were honest mistakes. But then these honest mistakes, you know, became a very clear pattern,” said Yesenia Guitron, who first noticed some improper actions occurring soon after she began working at the Wells Fargo branch in St. Helena, California, in 2008, reports CBS News correspondent John Blackstone.

“People ending up with 10-to-15 debit cards that they didn’t request,” she said.

“For one customer?” Blackstone asked.

“For one customer,” Guitron responded.

The branch manager where she worked ignored her entreaties, so Guitron bucked the concern up the ladder by contacting human resources and the bank's ethics department, which was company policy as outlined in its company handbook.

“Constantly emailed them back, you know, this is happening," Guitron recalled, "What did you find? What are we going to do?”

After her paper trail of complaints piled up and mounted, and after she did not take the hint to play ball wth the unethical processes, Guitron's branch manager came to her desk. She was fired on the spot and led from the building. Larger companies, even those with longtime employees, almost always have a policy installed where at least two managers bring you a box for personal effects, and tell you to give up your keys, badges, security cards, and any other company property, before summarily escorting you off the property. They call it the walk of shame.

One minute you're a valued employee, and the next you're trash that must be removed from the premises. That's what you get when corporations are based on profits at all cost. Employees are churned, which means most workers are brought in for fairly short terms, often as part-timers or for several years, allowing the company to avoid paying many benefits and retirements, and insultating it from the actions of mostly short term employees. It is, unfortunately, a business model being rapidly embraced by many major U.S. banks where the constant cycle of layoffs and new hiring creates a culture of rapid turnover, and virtually zero accountability by upper management.

However, Guitron brought a lawsuit against Wells Fargo in 2010, claiming she was dismissed from her job because she raised concerns concerning bank employees "opening accounts without the consent or authorization of the prospective clients.” Guitron says she felt her situation bore a strange resemblance to the famous case of Erin Brokovich, where few believed what she was saying was happening. She also quickly discovered her fears were well-founded after federal judge Claudia Wilken, a liberal-Democrat appointee appointed by President Bill Clinton a decade and a half earlier, swiftly dismissed the case, telling Guitron and her fellow plaintiffs that there was insufficient evidence of conspiracy by Wells Fargo, and concurring that the firings were for performance reasons, specifically sales goals, and not the result of retribution.

The bank sent CBS News a statement reading: “We do not tolerate retaliation against team members who report their concerns,” while noting they “agree with the judge’s finding that her claims of retaliation had no merit.”

Wells Fargo CEO Stumpf has twice apologized to Congress for the obviously improper actions perpetrated by his minions, though he has been slow and reluctant to embrace the evidence that supervisors and managers were in on the mounting schemes. Guitron went above and beyond the call of duty to alert supervisors to potential issues. Let this be a lesson to you; even if you do the right thing, there's a fairly good chance you're going to be squished like a bug as the system chews you up and spits you out. Guitron paid the price, finding herself with no job for months while attempting to raise two children, but thankfully she has since found employment as a property manager. She says she may leave the banking industry to those with a stronger stomach.

Reluctantly, Stumpf has been forced into contrition before angry Senators and Representatives of both political parties.

“There is no question, Mr. Chairman, we should have done more sooner,” Stumpf said at a recent congressional hearing.

“To me, it’s kind of like, I told you so,” Guitron told reporters. “You know, I wasn’t making things up. I had more than enough evidence to prove...what I was saying and it was a big deal.”

People are listening to her now. However, you need to understand the beauty of how major corporations are designed. There are numerous layers of administrators, which insulates the higher-ups from accountability and causes the person at the top to be almost invincible, so long as the massive bonuses continue reaching the proper people—and the right people don't get incarcerated. Some of those funds are then forwarded through lobbying efforts and a variety of channels toward the proper politicians who vote for massive bailouts and lower threshholds of regulation, and the cycle continues.

Meanwhile, Wells Fargo may be forced into a complex and costly process of unravelling what it has wrought, auditing its own accounts to extract those two million phone credit card and debit card accounts from the system, and somehow assuring Americans that all that loose personal data and all those hits on the credit agencies will not have a ripple effect lasting decades.

Related Thursday Review articles:

Wells Fargo's Expanding Scandals; Keith H. Roberts; Thursday Review; October 1, 2016.

Wells Fargo Ex-Employees: Fired For Shunning Fake Account Scheme; Keith H. Roberts ; Thursday Review; September 25, 2016.