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Wells Fargo's 2008 Hangover

Image: "Armed Robbers Crash SUV into Wells Fargo Museum, Steal Gold" (January 27, 2015)

Earlier this week, the San Francisco Business Times afternoon brief reported that California Treasurer John Chiang had suspended Wells Fargo Bank from “several key banking relationships” with the state of California.  This means the Treasurer’s office will not use WFB to underwrite state bond offerings, one of its key business relationships with the state. 

This was followed by video footage of the Stumpf’s testimony before the House Financial Services Committee in which Rep. Meeks characterized the bank as a criminal enterprise, drawing a scathing parallel between actual bank robbers and the bank’s fraudulent activities.  No longer ‘too big to fail,’ Rep. Waters said that WFB should be broken up, characterizing the bank as ‘too big to manage.’  

If you haven’t had the time to follow the recent events, or don’t care about the details, here is a short synopsis:

Wells Fargo is predominantly a consumer retail bank focused on deposit accounts, consumer lending and home mortgages.  Without heavy investment in the exotic credit default swaps and collateralized debt securities, it emerged from the 2008 financial crisis in better shape than most other banks.  Federal regulators were threatening to shut down Wachovia and instead tapped WFB as a likely buyer due to its relatively robust balance sheet.  In general, Wells Fargo was able to navigate the 2008 crisis without any meaningful damage. 

Wells Fargo’s strength has now apparently emerged as its greatest weakness.  Focusing on depositor accounts and consumer products insulated the bank from the problems of 2008, but it also means the bank has fewer opportunities for competitive growth.  To compensate, WFB leverages existing customer relationships by marketing to a captive audience, called cross-selling or up-selling.  For example, a no-fee checking account depositor may be converted into a consumer credit card holder and later into a mortgage debtor. 

Cross-selling is the bank’s value proposition to investors.  It is arguable the foundation of its market capitalization.  Management at all levels of the bank (indeed, even the highest levels) understood that this was an essential metric and designed compensation that would incentivize sales goals.  Managers were rewarded for meeting sales quotas while employees were punished for missing them.  Aggressive selling inevitably degraded into unethical practices, and ultimately into a culture of fraud. 

The financial crisis of 2008 was the most important challenge to the new Obama Administration.  It was unprecedented: there were ‘Occupy Wall Street’ camps throughout the United States populated by financial refugees.  And yet, these camps eventually dwindled and disappeared without any momentous event.  There was no closure.  The lack of effective – and visible – enforcement of the financial regulations was a failure of accountability.     

As a result, it was widely believed that the Administration had missed a once-in-a-lifetime opportunity to implement sweeping financial reform.   Now, eight years later at the sunset of the Obama Administration, it may be that the same financial regulators are seeking a ‘do-over.’  In addition to bearing the consequences of its own misdeeds, Wells Fargo might also be burdened with the sins of all of Wall Street’s unrepentant. 

Whatever the final result, its certain that Wells Fargo won’t weather this crisis quite so easily.