Written by Alexis Datta, Class of 2020
The Recent History of Banking
In 2008, the crash of the American economy made obvious the massive rift between Wall Street and the American Main Street. The publication of several books on the crisis, as well as the release of the record-breaking film, “The Big Short,” served to highlight the corruption taking place in the financial services industry. This resulted in several people calling large banks that had seemingly orchestrated the crisis, and asking for financial restitution.
After the financial crisis broke, the government mandated that banks do several things to restrict their financial risk while the CEOs of the nine largest banks in the US met with then Treasury Secretary Henry Paulson Jr. and signed a document stating that they would sell shares to the government. Thus, the Troubled Asset Relief Program (TARP) was created. The program was initially authorized with $700 billion, but was reduced in 2010 to $475 billion. TARP allowed the government to buy toxic assets from financial institutions so that they could resume normal operations. According to the agreement, banks would have to eventually buy back the shares from the government. Therefore the equity holding of the government in the banks acted as a form of debt, and this served to increase market confidence.
In spite of this significant spending by the US government, the program fell short of the public expectations that the CEOs of these banks should be jailed for destabilizing the American economy. When this failed to materialize, confidence among the public in the institutions of banking continued to decrease, creating the negative perceptions of banks we see today.
The negative perceptions have been reinforced by recent news reports about Wells Fargo bank. This is an indication that the future of banking might be different from what it has been in the past.
Although Wells Fargo’s investment banking division was not implicated in 2008, its commercial bank, Wells Fargo Securities, was under scrutiny in September 2016 for fraudulently creating fake customer accounts in an effort to meet high-pressured sales goals. As a result, Wells Fargo agreed to pay $190 million in settlement for its fraudulent practice called “cross-selling.” Cross-selling is a practice used by institutions to sell multiple products to a customer. Often, this is used as a method to increase sales, as a company can create a target cross-selling ratio for its salespeople and create incentives for reaching this ratio. In an attempt to artificially boost the cross-selling rations, some Wells Fargo employees allegedly created two million additional deposit and credit card accounts without the permission of their clients. In a recent congressional hearing, in response to a question by Senator Elizabeth Warren about the use of cross-selling to inflate stock prices, the CEO and Chairman of Wells Fargo stated that “cross selling is shorthand for deepening relationships.” While the Wall Street Journal estimates that the average number of accounts that clients have with their banks is slightly less than 3, Wells Fargo set the target for its sales force at 8.
The results for the firm are damaging. The $185 million settlement and $5 million compensation amount for affected clients is a small amount for the firm, but Wells Fargo’s stock dropped significantly once the fraud was made public, magnifying the mistrust from investors, while the bank also lost its position as the “world’s most valuable bank” to rival JPMorgan Chase. The bank’s most significant changes affected its leadership; CEO John Stumpf stepped down from his position as chairman and CEO, ceded his seat on the Federal Reserve, and is also slowly removing himself from other large corporations’ boards, such as Target and Chevron. As an outcome of the congressional hearing, Wells has been mandated to “clawback” an amount of over $100 million from Wells Fargo’s Consumer Banking Chief Carrie Tolstedt, who oversaw the division that created the fake accounts.
Notwithstanding the legal issues involved in implementing the congressional mandates, it appears that the decisions signify a change in the system of accountability. The company, whose stock rallied on the day of Stumpf’s hearing, may not be affected as badly as will be the senior executives who oversaw the scandal.
The Future of Banking
Although none of this is a real indication of change in the banking industry, it is important to acknowledge that the repercussions seen in this case are unprecedented. Stumpf’s replacement as the new CEO of Wells Fargo, Timothy J. Sloan, sends a signal that consumers and regulators are watching banks’ activities and focusing on the actions of top executives. In the aftermath of 2008, a small number of bankers were jailed for their actions, even though thousands were prosecuted. This might have been due to big banks being too closely tied to governmental and judicial organisation. Moving forwards, top executives of banks should be more accountable for the actions of their firms, and like with the Wells Fargo case, repercussions should be effective immediately in order to send the signal that the activities of banks are not to be taken lightly. The same can be said for other accountability measures for banks, such as transparency and accuracy in financial reporting. As government and consumers keep a careful eye on the actions of banks, those in top executive positions should be the ones working to lead the future of banking into a more trusting position.