Time to Treat Bank CEOs Like Adults

September 26, 2016

Dean Baker
Truthout, September 26, 2016

See article on original site

The country’s major banks are like trouble-making adolescents. They constantly get involved in some new and unimagined form of mischief. Back in the housing bubble years it was the pushing, packaging and selling of fraudulent mortgages. Just a few years later we had JP Morgan, the country’s largest bank, incurring billions in losses from the gambling debts of its “London Whale” subsidiary. And now we have the story of Wells Fargo, which fired 5,300 workers for selling phony accounts to the bank’s customers.

It is important to understand what is involved in this latest incident at Wells Fargo. The bank didn’t just discover last month that these employees had been ripping off its customers. These firings date back to 2011. The company has known for years that low-level employees were ripping off customers by assigning them accounts — and charging for them — which they did not ask for. And this was not an isolated incident, 5,300 workers is a lot of people even for a huge bank like Wells Fargo.  

When so many workers break the rules, this suggests a problem with the system, not bad behavior by a rogue employee. And, it is not hard to find the problem with the system. The bank gave these low level employees stringent quotas for account sales. In order to make these quotas, bank employees routinely made up phony accounts. This practice went on for five years.

As it became aware of widespread abuses, it’s hard to understand why the bank would not change its quota system for employees. One possibility is that they actually encouraged this behavior, since the new accounts (even phony accounts) would be seen as good news on Wall Street and drive up the bank’s stock price.

Certainly Wells Fargo CEO John Stumpf, as a major share and options holder, stood to gain from propping up the stock price, as pointed out by reporter David Dayan. In keeping with this explanation, Carrie Tolsted, the executive most immediately responsible for overseeing account sales, announced her resignation and took away $125 million in compensation. This is equal to the annual pay of roughly 5,000 starting bank tellers at Wells Fargo. That is not ordinarily the way employees are treated when they seriously mess up on the job.

Regardless of the exact motives, the real question is what will be the consequences for Stumpf and other top executives. Thus far, he has been forced to stand before a Senate committee and look contrite for four hours. Stumpf stands to make $19 million this year in compensation. That’s almost $5 million for each hour of contrition. Millions of trouble-making high school students must be very jealous.

There is little reason for most of us to worry about Stumpf contrition, or lack thereof. His bank broke the law repeatedly on a large scale. And, he was aware of these violations, yet he nonetheless left in place the incentive structure that caused them. In the adult world this should mean being held accountable.

This is not a question of being vindictive towards Stumpf, it’s a matter of getting the incentives right. If the only price for large-scale law breaking by the top executives of the big banks is a few hours of public shaming, but the rewards are tens of millions or even hundreds of millions in compensation, then we will continue to see bankers disregard the law, as they did at Wells Fargo and they did on a larger scale during the run-up of housing bubble.

There is another aspect to the Wells Fargo scandal that is worth considering. Insofar as the bank was booking revenue on accounts that didn’t exist, it was also ripping off the banks’ shareholders. The shareholders’ interests are supposed to be protected by the bank’s board of directors.

It doesn’t seem the shareholders got much help there. It is a very prominent group, including Elaine Chao, a member of President George W. Bush’s cabinet (and Senate majority leader Mitch McConnell’s wife) and Frederico Pena, a member of President Bill Clinton’s cabinet. Of course the board also includes Mr. Stumpf as chair.

It’s hard not to wonder if the board ever asked questions about the large number of employees being fired for creating phony accounts. Did the board ever ask if they could get a CEO who was just as good for lower pay? For example, could they have paid Stumpf or his replacement half as much ($9.5 million a year) and gotten someone just as good, or would this person only have needed to fire 2,650 employees for ripping off the bank’s customers.

The odds are that none of the board members asked these sorts of questions. After all, they were pocketing an average of more than $250,000 a year for very part-time work. They probably didn’t give much thought as to whether they were serving shareholders well. In corporate America, and especially at the big banks, no one is expected to act like adults, they understand it is about stuffing your pockets at everyone else’s expense.

Support Cepr

APOYAR A CEPR

If you value CEPR's work, support us by making a financial contribution.

Si valora el trabajo de CEPR, apóyenos haciendo una contribución financiera.

Donate Apóyanos

Keep up with our latest news